British Banking System Still At Risk
The UK isn’t out of the woods yet, according to TimesOnline:
Britain’s financial system is vulnerable to new shocks in the wake of its most severe challenge for decades, and banks and authorities must learn the lessons of the crisis, the Bank of England says today.
In its first detailed analysis of the squeeze that has engulfed credit markets since the summer, the Bank says that financial institutions have become more fragile and that the availability of credit may tighten. In turn, it sounds a warning that tighter lending conditions could spell serious fallout for the economy, with sub-prime borrowers and highly-leveraged companies particularly exposed.
The Bank’s unexpectedly gloomy report goes on to warn investors that share prices in Britain and the US could prove “vulnerable to any further revision in growth prospects”. A further danger is that the dollar could fall sharply if adverse sentiment towards US securities persists, it says.
Many British banks, such as the troubled Northern Rock, invested heavily in American-held Mortgage debt. The housing crisis led many of these financial institutions to reexamine their plans for debt consolidation.
Mortgage Acceleration?
Many find themselves tired of dealing with lenders, particularly ones which may not remain in business much longer. This has led to the use of mortgage accelerators as a means of paying down a home loan early so as to enable a home owner to be free and clear of a home loan after a short number of years.
Owning a home free and clear after a successful mortgage acceleration gives many a feeling of freedom. Often a home is the largest debt ever possessed by a person. Paying off such debt gives a feeling of success and financial independence.
In addition, most home loans end up charging more interest over the life of the loan than the original purchase price of the home. Early mortgage payoff can enable a homeowner to consider purchasing a second property.
Consumer Confidence Plummets
Many American consumers are tired of the scandalous and illegal methods employed by lenders. One method employed by consumers to avoid dealing with lenders is to utilize a bi weekly mortgage payment method to pay their loan down early.
Bloomberg is reporting:
Consumer confidence fell more than forecast in October, a sign Americans are growing concerned about falling home values, rising fuel bills and dimmer job prospects.
The Conference Board’s index of confidence declined to 95.6, the lowest since October 2005, from a revised 99.5 the prior month, the New York-based group said today. A separate report showed declines in property values accelerated in August.
The confidence report raises concern consumers will put a brake on spending, which accounts for more than two-thirds of the economy. The Federal Reserve is forecast to cut interest rates tomorrow to prevent the deepening housing recession from triggering a broader economic decline, economists said.
“Sentiment is taking the next step down,” said Carl Riccadonna, an economist at Deutsche Bank Securities in New York. “Housing is clearly the root of the problem. If consumer spending falls apart, the Fed will have much bigger problems to contend with.”
The lack of confidence held by consumers for mortgage lenders will doubtless result in the lenders continuing to struggle.
Too Soon to Rejoice for Countrywide
Countrywide made a miracle comeback after taking a hammering in the stock market by reporting that they intend to make a profit this quarter. The Wall Street Journal is cautioning that Countrywide may not be out of the woods yet.
Countrywide Financial Corp. cheered investors last week by pledging a quick return to profitability, boosting the stock price that day 32%.
But some analysts warn that the nation’s largest home-mortgage lender by loan volume hasn’t gone far enough in marking down the value of mortgage securities it holds and may have trouble delivering on that profit vow.
In 4 p.m. New York Stock Exchange composite trading, Countrywide’s stock fell 47 cents, or 2.7%, to $16.83. The share price is down 60% so far this year, dropping its market value to just under $10 billion.
The Calabasas, Calif., company Friday reported a loss of $1.2 billion for the third quarter. The loss reflected write-downs in the value of loans and securities, higher provisions for credit losses and charges related to a plan to shed as many as 12,000 jobs, or 20% of its work force. Even so, executives, including Chief Executive Angelo Mozilo, accentuated the positive, maintaining the quarterly dividend at 15 cents a share and projecting profits in the current quarter and in 2008.
“Not so fast,” Frederick Cannon, an analyst at Keefe, Bruyette & Woods, said in a research note yesterday, predicting that the stock will “underperform” the market.
Because investors have grown so jumpy about the surge in defaults on mortgages, lenders like Countrywide can no longer fund themselves with short-term borrowings in the capital markets, such as by issuing commercial paper. So Countrywide is relying heavily on collecting more deposits at its savings-bank unit, Countrywide Bank. But Countrywide has yet to show that it can “earn above its cost of capital” under this new model at a time when the outlook for losses from defaults is unclear, Mr. Cannon says.
While a marked profit is very important for Countrywide, other lender’s constant failures due to mismanaged debt consolidation illustrates the danger lenders face.
Worst Quarter in the Past Five Years
Bad news for the economy, which despite some gleams of hope, has just closed the worst quarter in the last five years. Much of this is a result of the housing boom (and resulting crisis)
TheStreet explores some of the reasons for this:
nalysts note that a weaker U.S. dollar, which continually set record lows against the euro during the third quarter, undoubtedly aided some export-heavy sectors. Unfortunately, the belief is that housing woes and a slowdown to the U.S. economy will sabotage profit growth for many.
“Downward estimate revisions have already come in from the banking sector, consumer finance, and mortgage companies,” notes John Butters, research analyst with Thomson Financial.
As the Dow Jones Industrial crossed back above the 14,000 level last week, though, it became apparent that traders believe the estimate is unreasonably low, and that they expect companies to surprise to the upside during the reporting season.
With the nations economic future largely unknown, many consumers are taking to making bi weekly mortgage payments in an effort to decrease their dependency upon banks.
When Losing Money Pays
It seems like every day more and more banks decide to write off mortgage debt. A mortgage acceleration of sorts, in which every large lender seeks as much tax benefit as they can gain from having invested badly.
A tax loophole has allowed banks to lend to anyone, gambling that if they lost money, they’d just pass the loss on to the government in the form of a tax writeoff.
The International Herald Tribune has noticed this phenomena:
Some of the competitive advantages of these firms, including a favorable tax structure, were also under intense scrutiny in Congress - and even from within its ranks.
“A tax loophole the size of a Mack truck is right now generating unwarranted and unfair windfalls to a privileged group of money managers,” Leo Hindery Jr., a private equity executive, said last month. “To no one’s surprise, these individuals are driving right through this $12-billion-a-year hole.”
The grim mood was captured by Donald Putnam, founder and managing partner of Grail Partners, a merchant bank: “If a rising tide lifts all boats, a sinking ship sinks all ships. There will be many more losers than winners when this is through.”
Sadly homeowners losing their homes to foreclosure are often taxed on the money which that bank ‘writes-off’.
Asian Banks Next to Crumble
Amidst a banking meltdown in both the US and Europe, analysts are expecting that Asia will be the next, and quite likely, the hardest hit. Bloomberg reports:
Fitch Ratings cut ratings on two Asian collateralized debt obligations linked to company debt, indicating an increased risk of default, the company said today.
Fitch lowered a $50.9 million synthetic CDO that is managed by DBS Group Holdings Ltd. by one level to AA+, the second- highest investment-grade. Fitch also cut a $12.6 million synthetic CDO arranged by Lehman Brothers Holdings Inc. by two levels to A.
Investors are shunning CDOs and other credit assets on concerns that losses on U.S. home loans to buyers with poor credit records are spreading to other credit markets. Sales of CDOs, once the fastest-growing part of the debt market, fell to $16 billion worldwide during September, the lowest in 21 months, according to Morgan Stanley.
CDOs are securities that pool loans, bonds or credit- default swaps and use the income to pay investors. The securities are divided into different parts of varying risk and return. Synthetic CDOs package credit-default swaps, which are contracts investors use to speculate on a company’s ability to pay debt.
With banks unexpectedly finding themselves in debt due to bad mortgage investment, it will be interesting to see how well Asian banks deal with debt consolidation.
Trouble for the Average American
The average American is a consumer. Americans consume more than any other nation, their purchases fueling the world economy. Many Americans fail to realize the possibilities afforded by saving, proper investing, or even simply making bi weekly mortgage payments.
InvestorInsight continues on this tangent:
The American consumer has been the dominant engine on the demand side of the global economy for the past 11 years. With real consumption growth averaging nearly 4% over the 1996 to 2006 interval, US consumption expenditures currently total over $9.6 trillion, or 19% of world GDP (at market exchange rates).
Growth in US consumer demand is typically powered by two forces - income and wealth (see Figure 1). Since the mid-1990s, income support has lagged while wealth effects have emerged as increasingly powerful drivers of US consumption. That has been especially the case in the current economic expansion, which has faced the combined headwinds of subpar employment growth and relatively stagnant real wages. As a result, over the past 69 months, private sector compensation - the broadest measure of earned labor income in the US economy - has increased only 17% in real, or inflation adjusted, terms. That falls nearly $480 billion short of the 28% increase that had occurred, on average, over comparable periods of the past four US business cycle expansions.
Lacking in support from labor income, US consumers turned to wealth effects from rapidly appreciating assets - principally residential property - to fuel booming consumption. By Federal Reserve estimates, net equity extraction from residential property surged from 3% of disposable personal income in 2001 to nearly 9% by 2005 - more than sufficient to offset the shortfall in labor income generation and keep consumption on a rapid growth path. There was no stopping the asset-dependent American consumer.
That was then. Both income and wealth effects are now coming under increasingly intense pressure - leaving consumers with little choice other than to rein in excessive demand. The persistently subpar trend in labor income growth is about to be squeezed further by the pressures of a cyclical adjustment in production and employment. In August and September 2007, private sector nonfarm payrolls expanded, on average, by only 52,000 per month - literally one-third the average pace of 157,000 of the preceding 24 months. Moreover, this dramatic slowdown in the organic job creating capacity of the US economy is likely to be exacerbated by a sharp fall off in residential construction sector employment in the months ahead. Jobs in the homebuilding sector are currently down only about 5% from peak levels despite a 40% fall-off in housing starts; it is only a matter of time before jobs and activity move into closer alignment in this highly cyclical - and now very depressed - sector.
Hope is quickly fading for the American economy, and something certainly needs to be done to turn things around.
The $100 Billion Bailout Fund
Further outcries are being seen regarding the disastrous response to the housing crisis. Counterpunch editorializes:
Friday’s bloodbath on Wall Street proved that the troubles in the credit markets have not been relieved by the Fed’s rate cuts. The Dow Jones slipped 367 points on the 20th anniversary of Black Monday, the stock market’s biggest one-day loss in history. Since Friday, Asian markets have plunged; stocks are down sharply in Japan, Australia, Hong Kong, Indonesia, the Philippines, Taiwan and South Korea. The global sell-off is a reaction to ongoing problems in the subprime market and deeper-rooted systemic issues related to the US’s structured-debt model.
The sudden downturn in the stock market provided a fitting backdrop for Treasury Secretary Paulson’s appearance at the G-7 meetings in Washington DC. Paulson has largely shrugged off the decline in housing and the growing volatility in the equities markets. As the representative for the world’s biggest economy, Paulson instructed the other nations on how best to adjust their currencies and on the dangers of “sovereign wealth funds”. No one was listening. Foreign ministers and central bankers are less receptive to the scolding of US officials. America needs to put its own house in order before it gives advice to anyone else.
What everyone at the meetings really wanted to know was why the United States destabilized the global economic system by selling hundreds of billions of dollars of worthless mortgage-backed securities to banks and pension funds around the world? Aren’t there any regulators in the US anymore?
Sadly it would appear that the bad markets fueled by mortgage acceleration and foreclosure has destroyed most of the hope for the US economy. Trust in American holdings is at an all time low, and other nations are withdrawing from US markets.
Critical Response to Big Bank’s Solution
In an attempt at debt consolidation, many of the largest banks in the US have announced a plan to hide losses in real estate holdings by renaming the divisions losing money.
The AsiaTimes reports:
Three of the most bounteous of American finance capital’s heavy hitters, Citigroup, JP Morgan/Chase and Bank of America, floated an idea over the weekend of October 13-14 to establish, within the neighborhood of US$100 billion (a very nice neighborhood indeed) of these banks’ funds, something called “the Master-Liquidity Enhancement Conduit”, or M-LEC - commonly called “the superfund”.
In simplest terms, what the big hitters were hoping was that when investors dealt with these institutions after the establishment of the M-LEC, no longer would the big institutions be tinged with the pervading aroma of feculent subprime carrion that currently permeates much of American finance. The idea was that the M-LEC would buy the questionable (although not the worst) of the subprime SIVs, taking them off the bank’s balance sheets, and, in so doing, restoring confidence in the big banks.
But if it was going to be this easy to solve the subprime mess it probably would have been done by now, and, as the markets realized this, the selling of last week set in. (This selling was matched in Asia on Monday, where stocks plunged, led by Japan’s benchmark Nikkei 225 stock index losing 3.20% and the Korea Composite Stock Price Index shedding 3.8% in early trade. Stocks were also down in Australia, Hong Kong, Indonesia, the Philippines and Taiwan.)
Clearly, foreign newspapers do not approve of the wild banking style being adopted by the American banking industry. It may be a true miracle should the US successfully weather these tough times.