It's been awhile since I've done one of these, what with all the elections news to consider. But this article highlighted by Atrios is a reminder that I should correct that:
June 4 (Bloomberg) -- Most of the 5.85 million subprime mortgages in the U.S. are in danger of defaulting in the next 12 months because of restrictions on changing terms of the loans, according to Offit Capital Advisors.
That made me wonder what Roubini has been saying of late. Erm... Not good:
Independent analysts of the banking system and of other financial intermediaries have clearly pointed out that the massive writedowns and losses of financial institutions will continue as the credit losses will spread from subprime to near prime and prime mortgages; to commercial real estate loans that had similarly poor underwriting standards; to unsecured consumer credit (credit cards under stress given the balance sheets of households, auto loans that are in big trouble with auto sales plunging, student loans whose market is now frozen); to leveraged loans and bridge loans that financed reckless LBOs that should have never happened in the first place; to muni bonds now that distressed municipalities - see Vallejo in California as the canary in the mine - will experience an onslaught of muni bonds defaults; to monoline insurers battered by a double whammy of muni bonds under stress on top of the trouble of toxic MBS and CDO that were wrapped into monoline guarantees; to industrial and commercial loans as many debt burdened firms are in trouble; to corporate bonds as hundreds of billions of dollars of junk bonds were issued in the last four years by heavily indebted and poorly performing corporations; to the CDS market where $62 trillion of nominal protections - that was sold by a small group of broker dealers, hedge funds and monoline insurers - is sitting on top of an outstanding stock of only $6 trillion of corporate bonds; with the ensuing risk that the losses among the sellers of protection will lead to some of them going belly up and thus show to the buyers of protection that there was no hedge as counterparty risk rears its ugly head.
These delinquencies, defaults and bankruptcies have only started to rise outside subprime mortgages but they are now mounting in a tsunami of rising losses as the subprime disaster was only the tip of an iceberg of a credit bubble that run amok across the economy and across many and different credit markets.No wonder that now heads just started to roll at the top of Wachovia and WaMu; that Lehman - even with the protection of the Fed liquidity blanket - is in trouble again; that Countrywide is on the verge of bankruptcy once BofA pulls out of a loser acquisition of the biggest and most insolvent mortgage lender; that the troubles among mortgage lenders are now spreading to the UK where the housing bubble was as big - if not bigger - than in the US; that S&P has finally downgraded major financial institutions; and now that more financial trouble lurks ahead for major US banks and smaller US banks (small banks that will go into bankruptcy by the hundreds as the housing recession deepens, home prices collapse and the economic recession deepens and persist longer than expected by the market consensus). So after a brief period of complacency - if not delusional optimism that the worst was behind us - a painful reality check is setting in. Fed Funds easing and new liquidity facilities (TAF, TSLF, PDCF, Swap lines) of the Fed cannot resolve insolvency and credit problems that go well beyond illiquidity.
A contracting economy, falling employment for months now, the worst US housing recession since the Great Depression, collapsing home values, millions of households underwater with an incentive to walk away from their home, a shopped out and saving-less and debt burdened US consumer buffeted by falling home prices, falling HEW, falling stock prices, rising debt servicing ratios, oil at $130 a barrel and gasoline at $4 a gallon, collapsing consumer confidence and falling employment are all taking the toll on the economy, on financial markets, on banks, on the shadow financial system and on money markets and credit markets. We were in the eye of the storm rather than past the storm; and the recent events and developments suggest that the worst is ahead of us, for the economy, for equity markets, for credit markets and for money markets.
Oddly, I find the idea that this is the eye of the storm comforting. I mean, even if it gets worse before it gets better, we're still half way, right? Riiight....
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