Wednesday, January 02, 2008

Credit crunch

The headline of today's FT is not cheerful: "Outlook worst since dotcom burst" and it has a good article comparing the Japanese banking crisis of the 1990s with America's today. Both were triggered by a credit shock. Japan's resulted in losses of $700bn. The Fed's initial estimate of US losses was $50bn but with defaults rising and property prices falling, most investment banks reckon the subprime losses will be between $200bn-$400bn. In addition, there are defaults on credit cards and commercial property loans and many bankers believe that the total carnage will amount to $400bn-$800bn.
There are two more problems. One is that with the massive growth in the debt markets, many of those bad sub-prime loans were bundled into bonds and derivatives and sold on to foreign banks, asset managers and governments so it is a global problem, not one confined to the USA. The other is that in the good old days, banks used to hold an ounce of gold or other tangible asset to back each bank note. This practice was abandoned long ago so if all the depositors of a bank asked for their money back, it would not be able to repay every one of them.
London Scottish Bank is the latest one to be in trouble. Its CEO said, "This is not another Northern Rock situation...we have a very strong balance sheet." He then says that the reason for that is that it is impossible for the 10,000 retail depositors to withdraw their money as they are locked into fixed-term high interest bonds. Oh well, that's fine then, isn't it?


Anonymous dogbreath said...

I am an old dog who remembers life from the Oz mining boom onwards;1972-4 is of fond memory with the Commercial Union Rights issue @ 18% yield.LTCM- we were pearing into the abyss .However in an era of CDOs how many Supervisory Boards understand what instruments their institution is using ?very few and US Mutual Funds are not much better. What all investors wanting to sell?I fear that the present Credit Pig in the Python will take another 2/3 years to be digested .Look out for some more spectacular banking failures,I fear.

10:09 am  
Blogger kinglear said...

ww- you know I have been an enormous bear for some time on all this- my own view is we ain't seen nothing yet. Usually there is a fibal " shock" from which it is possible to recover. So far, we have only seen denials and half-truths, but I certainly agree with you that lots of the pain has been exported by the US. It would appear that German, Swiss and Austrian Banks have the highest exposure ( relatively speaking). Despite the downturn, I'll just stick with good old land - and if necessary plant a few turnips.

10:15 am  
Blogger Eurodog said...

Banknotes under the mattress, I suggest.

3:08 pm  
Blogger Ellee Seymour said...

A depressing start to the year, on top of the horrific violence and murders in Pakistan and Kenya.

3:35 pm  

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