Is "The Credit Crunch is Over" Talk Premature?

Posted on by

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.

Print Friendly, PDF & Email


  1. eh

    As long as financials can park their crap paper at the Fed — which is not too discriminating about the quality of that collateral — and get treasuries to borrow against, then I guess this might have restored some “liquidity”. But eventually all that paper must be taken back onto balance sheets — one presumes — and then what? And how about surging mortgage defaults? This wave will not abate for some years, and that’s a lot of bad debt.

    Over the years I’ve gotten used to sophomoric cheerleading from the mainstream (i.e. tabloid) financial press, but new lows have been reached over the last months.

    But anyway, Americans will soon resume becoming wealthy by selling ever more expensive houses to each other with conjured money, and everything will be fine again.

  2. Steve

    On that 25% haircut: Is UBS’s minority interest in the transferred portfolio structured as a first-loss position?

  3. Yves Smith

    The FT did not make it sound like that (but good catch, that would be a way to finesse a much deeper real haircut), but there is the little mystery of the “minority position” as in UBS evidently had to kick in some hard cash, so it effectively got less than 75 cents on the dollar:

    The UBS debt – which is being bought at a 25 per cent discount to its face value of $20bn – will be placed in a new BlackRock fund and marketed to investors, the people said.

    The bank will hold a minority interest in the fund, which will enable it to participate in any potential upside.

  4. Hubert

    that would be too bad a reporting job from the FT.
    I guess these were the super-duper-senior tranches compared to the only super senior or pure senior tranches around.
    We just do not know and take confidence that the Schweizerische Nationalbank stands firm behind UBS.

  5. Anonymous

    A Japanese bank marking bonds at 10 cents and a Swiss bank selling them at 75 cents are talking about different bonds. No Japanese bank is marking the equivalent bonds at 10 cents on the dollar. You are confusing the issues by referring to all subprime bonds as if they were the same. To imply that they are is disingenuous.

Comments are closed.