Collapse May Be Close

Earthside Comments: It's pretty close, folks.

Link: Which Bank is Going to Follow the Bear? | Times of London

So who is next? As advisers to Bear Stearns struggle to find a buyer or funding in the next 28 days, Wall Street, the City and the financial district in Tokyo were scrabbling to find out who is the most exposed to Bear Stearns, either through loans or trading positions.

Traders in all three centres were panicking even for those banks not directly exposed to Bear. They feared that the problems experienced at the stricken bank signalled that the credit crisis has deteriorated to a new level.

Yesterday, traders began to look anxiously at the robustness of Lehman Brothers, which, although bigger than Bear, is small compared with JPMorgan Chase, Morgan Stanley and Citigroup.

Shares in Lehman dropped 11 per cent yesterday, a far bigger fall than its other rivals, which saw their stock decline by about 3 per cent.

Although Lehman is more diversified than Bear, it has a similar investment profile, with huge holdings in mortgage-backed debt. Lehman sought to reassure the market when it said yesterday that it had secured a $2 billion (£1 billion) credit line with Paolo Tonucci, the bank’s global treasurer, calling it “a strong signal from the market and our key bank relationships”.

However, Chris Whalen, of the Wall Street consultancy Institutional Risk Analytics, said: “This is going to go all the way up the chain. There is a risk that all broker dealers are going to become an endangered species if the credit crisis is not sorted out. If they can’t fund themselves, they will have to shrink. All the other firms are in danger, too.”

He said that should the US Federal Reserve, the US Treasury and the Securities and Exchange Commission not devise a broad rescue plan to address the credit turmoil on Wall Street this weekend, “I would not be surprised to see an emergency bank holiday announced. That hasn’t happened since Roosevelt.” During the Depression, 75 years ago almost to the day, Franklin Roosevelt declared a four-day bank holiday, which stemmed a frantic run on banks. Mr Whalen added that should banks such as Lehman continue to be unable to sell the billions of dollars of mortgage-backed securities held, they were doomed. He said: “Broker dealers have to be able to get rid of assets. If they are illiquid, they die.”

Over the past ten years, global banks increased their issuance of mortgage-backed securities to feed a growing appetite for what investors believed were high yet stable yields. In 1998, banks issued $16.4 billion of the securities, according to calculations by Thomson Financial. By last year, the issuance figure had ballooned to $366 billion. Issuance so far this year is $4 billion.

The Royal Bank of Scotland was the world's biggest underwriter of mortgage-backed securities last year. An underwriting bank takes responsibility for selling the securities into the market.

RBS underwrote $44.7 billion of securities, taking a 12 per cent share of the market. Bear Stearns was the eighteenth-largest underwriter in 2007, underwriting $6.3 billion of the investments.

Fears of a UK financial casualty were also alive in the Square Mile, with banking stocks among the biggest losers on the stock market yesterday. HBOS, the UK’s biggest mortgage bank, led the sector down as the FTSE 100’s biggest faller, dropping more than 6 per cent to 528p a share, while Barclays closed down almost 5 per cent at 433p. Their shares fell even though British banks have tiny exposures to the American mortgage market in comparison with the big US and European investment banks.

Link:
Goldman Sachs to Unveil $3 Billion Writedown | Reuters

Investment bank Goldman Sachs (GS.N: Quote, Profile, Research) will announce asset writedowns of $3 billion when it posts earnings on Tuesday, Britain's Sunday Telegraph newspaper reported, without naming sources.

The company will report a fall of about 50 percent in first-quarter earnings, the newspaper said.

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TOTAL COLLAPSE OF THE GLOBAL ECONOMY

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Link: Wall Street fears for next Great Depression | Independent

Wall Street is bracing itself for another week of roller-coaster trading after more than $300 billion was wiped off the US equity markets on Friday following the emergency funding package put together by the Federal Reserve and JPMorgan Chase to rescue Bear Stearns.

One UK economist warned that the world is now close to a 1930s-like Great Depression, while New York traders said they had never experienced such fear. The Fed's emergency funding procedure was first used in the Depression and has rarely been used since.

A Goldman Sachs trader in New York said: "Everyone is in a total state of shock, aghast at what is happening. No one wants to talk, let alone deal; we're just standing by waiting. Everyone is nervous about what is going to emerge when trading starts tomorrow."

In the UK, Michael Taylor, a senior market strategist at Lombard, the economics consultancy, said on Friday night: "We have all been talking about a 1970s-style crisis but as each day goes by this looks more like the 1930s. No one has any clue as to where this is going to end; it's a self-feeding disaster." Mr Taylor, who had been relatively optimistic, has turned bearish: "It really does look as though the UK is now heading for a recession. The credit-crunch means that even if the Bank of England cuts rates again, the banks are in such a bad way they are unlikely to pass cuts on."

Mr Taylor added that he expects a sharp downturn in the real UK economy as the public and companies stop borrowing. "We have never seen anything like this before. This is new territory for us. Liquidity is being pumped into the system but the banks are not taking any notice. This is all about confidence. The more the central banks do, the more the banks seem to ignore what's going on."

Mr Taylor added that the problems unravelling at Bear Stearns are just the beginning: "There will be more banks and hedge funds heading for collapse."

One of the problems facing the markets is that, despite the Fed's move last week to feed them another $200bn, the banks are still not lending to each other.

"This crisis is one of faith. We are going to see even more problems in the hedge funds as they face margin calls," said Mark O'Sullivan, director of dealing at Currencies Direct in London. "What we are waiting for now is for the Fed to cut interest rates again this week. But that's already been discounted by the market and is unlikely to help restore confidence."

Mr O'Sullivan added that the dollar's free-fall is set to continue and may need cuts in European interest rates to trim the euro's recent strength against the dollar. "But the ECB doesn't like cutting rates," he said.

On Europe, Mr Taylor said that while the German economy remains strong, others such as Italy's and Spain's are weakening. "You could see a scenario where the eurozone breaks up if economies continue to be so worried about inflation."

European financial markets were relatively unscathed by Wall Street's crisis but traders expect there to be a backlash when stock markets open tomorrow.

The Fed's plan will give 28 days of secured funding to Bear Stearns, which saw its value slashed over the week by more than a half to $3.7bn. JP Morgan will provide the funding, but the Fed will bear the risk if the loan is not repaid. Fed chairman, Ben Bernanke, who pumped $200bn of loans to cash-strapped institutions last week, said more would be available to help others in distress.

Link: Zuckerman Says U.S. Economy May Face `Perfect Storm' | Bloomberg

Mortimer Zuckerman, co-founder of Boston Properties Inc., the largest U.S. office real estate investment trust, said the U.S. economy is in a recession and there's no sign of a recovery.

``We are looking at the worst set of macroeconomic conditions since the Great Depression,'' Zuckerman said in an interview with Bloomberg Television. ``I don't know where the bottom is. The federal government's going to have to do a lot more to contain what I think is the potential of a perfect storm.'' ...

... ``The most dangerous part in my judgment is what is going on in the housing world, where we're now running foreclosures at the rate of 2 million a year, where 9 million homes, according to the government, just slightly under 9 million homes, have either no equity in them or negative equity,'' he said.

``That will go up to 15 million if housing prices continue to go down this year as they've done last year,'' Zuckerman added.

``We are clearly heading down. We are in a recession even if it's not technically a recession. The February unemployment numbers were terrible,'' he said.

Comments

[Recession Stock Trading\]

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What is 'Recession Proof'?

You can almost hear the wallets snapping shut. Folks are cutting back on their spending every way they can. According to those who know, we are either in a recession, or are about to be. I would hate to be trying to sell real estate or new cars right now. Talk about hitting your head against the wall. Ouch!

That got me to thinking of what businesses make sense during a recession. Certainly health care does. Baby boomers are going to need every kind of health care imaginable. For all I know, economic bad times makes people sick too.

Other types of businesses that should be recession proof include vital home repairs, like plumbing, electrical, and roofing. Folks can't put off fixing a clogged toilet or a leaking roof just because they're a little short on cash.

And you know what they say about death and t.ax.es. A well-run funeral home or a tax consulting business shouldn't be hurt by an economic downturn.

But all these jobs require training, and even certification. And that takes time. By the time you've learned one of these trades, the recession may well be over. That got me to thinking about one business that's truly recession-proof, and you can get started almost immediately: Day Trading.

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