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Wednesday, March 19, 2008


global bank panic is not over

via ft -- rumor will continue to circulate in financials for months. and there still appear to be heightened tensions in the global financial system.

but even well beyond that, the bust in commerical real estate is apparently just getting started.

[T]he Architecture Billings Index (ABI) tumbled almost nine points in February. As a leading economic indicator of construction activity, the ABI shows an approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the February ABI rating fell to 41.8, its lowest level since October 2001, and down dramatically from the 50.7 mark in January.

as it manifests, smaller banks and particularly heavily-exposed midsized regional players will face a new set of threats emerging not from defaults in the residential and consumer lending aspects of their balance sheet -- elements which are in fact unusually small this go-round -- but the commerical real estate (CRE) and commerical and development (C&D) aspects, which are unusually large. i would not be surprised to see american regional banks at the epicenter of the next down leg in the financials as the realization of the nascent CRE bust becomes unavoidable on wall street and fuels fears of a deeper recession -- or worse, given continued weakness in residential housing. ambrose evans-pritchard is a dramatist, but he is not wrong to point out the possible.

America is not facing "recession-as-usual". It is in the grip of a property crash. House prices have fallen by 10 per cent so far; Goldman Sachs fears they may fall by 30 per cent in the end. The sub-prime mortgage industry has already disintegrated. Some 241 lenders have gone bust, or shut their doors.

The crisis has since spread to prime mortgages. Fannie Mae and Freddie Mac - the fortress agencies that guarantee 60 per cent of America's $11 trillion mortgage market - began to crumble last week. Even bodies standing at the top of the credit system are no longer deemed safe. As Barclays Capital put it, this was a "tsunami event".

Or in the words of City veteran David Buik at Cantor Fitzgerald: "No one in living memory has ever seen a banking crisis like this. I am older than God, and the outlook has never looked as bleak."

Any smug assumption that this will remain a local American affair may soon be confounded. The IMF has abruptly changed its tune. "Obviously the financial market crisis is now more serious and more global than a week ago," it said on Monday.

Property booms will soon be deflating across the Anglo-Saxon world and the eurozone's Club Med belt. Japan is already on the brink of recession. Debt levels are higher now in most rich countries than they were in 1929. The levels of financial leverage are greater.

As the Bank for International Settlements wrote last year, we are more vulnerable to a 1930s dénouement than people realise - should the authorities botch the response.

UPDATE: the lack of confidence in american banking is reflected here in something called the yen basis swap.

The last time the swap moved in this fashion was back in the 1990s, when concerns about the Japanese banks prompted the so-called “Japan premium.”

Now the situation appears reversed. Counterparty concerns about the US banks may have prompted funds to start unwinding their trades. Now it’s starting to look like a stampede to get out, with no bid on the swap.

What potential for damage does the emergence of an “America premium” have? Significant we’re told.

According to those with skin in this particular financial game, the recent dramatic move suggests significant potential losses. Anecdotally, one fund is said to have kissed goodbye to about a year’s profit getting out of this trade.

t-bills today finished yielding 0.59% -- near a post-war record low. it's utter and complete panic everywhere, and that is a truly massive amount of frightened cash sitting in t-bills earning deeply negative real rates.

UPDATE: yves smith with citigroup's call -- the Great Unwind has begun.

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