Pritchard: “I am Now Really Frightened”; Federal Reserve’s Rescue Has Failed
March 3rd, 2008“We are definitely not out of the woods with the subprime debacle. In fact, we are in for a year of steady increases in foreclosures and liquidity problems. There are no buyers for these securities now. If banks are holding these bombs, they’re stuck with them and the clock is ticking.
As those teaser rate loans reset, and f*cked buyers go bankrupt in increasing numbers (see chart above), banks are going to have serious problems.”
Via: Telegraph:
The verdict is in. The Fed’s emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed.
Yields on two-year US Treasuries plummeted to 1.63pc on Friday in a flight to safety, foretelling financial winter.
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The debt markets are freezing ever deeper, a full eight months into the crunch. Contagion is spreading into the safest pockets of the US credit universe.
It is hard to imagine a more plain-vanilla outfit than the Port Authority of New York and New Jersey, which manages bridges, bus terminals, and airports.
The authority is a public body, backed by the two states. Yet it had to pay 20pc rates in February after the near closure of the $330bn (£166m) “term-auction” market. It had originally expected to pay 4.3pc, but that was aeons ago in financial time.
“I never thought I would see anything like this in my life,” said James Steele, an HSBC economist in New York.
No sane mortal needs to know what term-auction means, except that it too became a tool of the US credit alchemists. Banks briefly used the market as laboratory for conjuring long-term loans at Alan Greenspan’s giveaway short-term rates. It has come unstuck. Next in line is the $45trillion derivatives market for credit default swaps (CDS).
Last week, the spreads on high-yield US bonds vaulted to 718 basis points. The iTraxx Crossover index measuring corporate default risk in Europe smashed the 600 barrier. We are now far beyond the August spike.
Sub-prime debt is plumbing new depths. A-rated securities issued in early 2007 fell to a record 12.72pc of face value on Friday. The BBB tier fetched 10.42pc. The “toxic” tranches are worthless.
Why won’t it end? Because US house prices are in free fall. The Case-Shiller index for the 20 biggest cities dropped 9.1pc year-on-year in December. The annualised rate of fall was 18pc in the fourth quarter, and gathering speed.
Much more drastic action is needed? What more drastic action is there besides a prime lending rate of 3% when inflation may very well be up to 10%? (Though the extent of this inflation is being concealed by the fact that the economic Powers That Be are keeping the price of gasoline momentarily suppressed.) Oh, and the US Dollar Index is fighting to plummet down to an even newer low of 73.50, from the looks of it. I really think this damn dam is about to burst.