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Shahla
Money Managing Guru
Joined: 13 Nov 2004
Posts: 3324
Cash Points ££ 126163.28
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 Posted: Tue Mar 06, 2007 4:57 am Post subject: US & UK Housing Market - How (Not) To Fix the Subprime M |
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As always, the market's way ahead of the Fed...
BEN BERNANKE told politicians in Washington this week that the collapse of subprime mortgage companies had been "contained".
Perhaps Dr. Ben was just thinking of Fremont delaying its fourth-quarter results...or New Century Financial (NEW) having to restate its earnings for the first nine months of last year.
Yes, that little nugget of news knocked NEW's stock 30% lower in one session last month. But the damage was still "contained", right? It's not like Bernanke had to revise GDP thirty per cent lower as a result.
And maybe the Fed chairman was just thinking of out-and-out mortgage lenders going bankrupt, like Ownit or MLN...rather than pan-global investment banks such as Merrill Lynch spending $1.3 billion to keep First Franklin running...or Credit Suisse funding the defunct ResMAE...or Bear Stearns picking up Encore in what ML-Implode.com calls a "firesale".
As always, however, the market's way ahead of the Fed. Stock in Merrill Lynch (MER) has dropped 15% from its top of January. Morgan Stanley (MS) has fallen almost 13%, as has Citigroup (C). Goldman Sachs (GS) is off nearly 10% for the last week alone – and not only because no one wants to own investment banks when investors take a bath on Chinese equity funds.
In the bond market too, Wall Street's biggest and best are being marked down. The price of credit-default swaps, the insurance contracts used to protect investors against non-paying bonds, have leapt on their debt. Since the start of January, for example, the cost of CDS insurance on Goldman's debt has risen by 52%.
The bond market thinks Goldman's debt just got riskier, in other words. In fact, "their own traders are valuing the three biggest securities firms as barely more creditworthy than junk bonds," says Shannon D. Harrington for Bloomberg.
"Prices for credit-default swaps linked to the bonds of the New York investment banks this week traded at levels that equate to debt ratings of Baa2, according to Moody's Investors Service. For Goldman, Morgan Stanley and Merrill Lynch & Co., that's five levels below the actual Aa3 rating on their senior unsecured notes and two steps above non-investment grade, or junk."
Why are the investment bankers so nervous about their own debt? Both Wall Street and the City of London earned record sums in the last 12 months. But at the top of the credit cycle – and with global asset values tumbling as the flood of easy money dries up thanks to rising rates in Japan, higher real rates in the US, and the threat of rising rates in Switzerland – the biggest security firms are starting to look awfully insecure. They just happened to make a lot of money selling mortgage-backed securities, too. Yet the risk of mortgage default only got shared, rather than passed along.
http://www.marketoracle.co.uk/Article453.html |
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