Even though there has been a lot of whistling-in-the-dark talk that the credit crisis is past, the evidence is far from conclusive. On the one hand, BlackRock bought $15 billion of subprime debt at a mere 25% discount to face. In March, UBS was rumored to have sold $24 billion of Alt-A for 70 cents on the dollar. Has the market really gotten that much better or were sexual favors exchanged?
I had dinner last night with a very senior Japanese buddy fresh off the plane from Tokyo. He mentioned in passing several Japanese banks’ writedowns of subprime paper, and in all cases, they marked it down to ten cents on the dollar. That isn’t to say the Japanese are right, merely that different institutions have very different views of what conservative pricing amounts to. But the seeming consistency says regulators pushed for deep haircuts.
The issue is that the credit crisis being behind us is not the same as the credit crunch being over (and note I am not convinced we won’t have a resumption of worries about systemic risk, given the possibility of an eventual GSE bailout, a CDS meltodown, and a downgrade of MBIA and/or Ambac, any of which would create turmoil). In the do-com bust, the economic recovery preceded an improvement in credit spreads by nearly a year. And unlike the last downturn, this time credit officers have been badly burned, and they tend to remain overly cautious long after the worst is past.
The fear factor is alive and well, and keeping bank lending in the US at bay, as reported in the Financial Times:
US banks tightened lending standards in the early months of this year in near-record numbers, a Federal Reserve report indicated on Monday, suggesting that the credit squeeze in the economy continued to intensify.
The senior loan officers’ survey reported that the fraction of banks tightening lending standards was “close to or above historical highs for nearly all loan categories” – including corporate loans, commercial real estate, mortgages, credit cards and other consumer loans…..
The loan officers’ survey was conducted in early April and covers the previous three months. It shows that banks not only continued to tighten credit terms but did so in increasing numbers relative to the last survey in January. In particular, the proportion tightening standards for consumer and commercial/industrial loans increased strongly as the credit squeeze broadened out beyond home loans.
Moreover, banks continued to tighten credit standards on mortgages across the board, reducing the availability of funds to finance purchases of homes. About 62 per cent said they tightened standards on prime loans, while 76 per cent tightened standards on “non-traditional loans”.
A historically high proportion of banks said they were tightening terms on credit cards and other consumer loans, while many also pointed to reduced involvement in the student loan business.
The odd bit is at the Milken Institute Global Conference, several participants mentioned ample liquidity. I suppose if you are a big enough fish and/or can borrow in yen, that may well be true, but for mere mortals limited to US lenders, the going looks to be rough.