Standard & Poor's Sees "Light At the End of the Tunnel"

If you were watching the US equity markets today and wondered what caused the sharp short-covering rally off the big gap down open due to the Carlyle Group hedge fund failure, it was the report issued by Standard & Poor's cited below that indicates that they see 'light at the end of the tunnel.'

Tanya Azarchs, the S&P analyst who helped Scott Bugie to write the report, appeared on a live interview on Bloomberg Television and reiterated the key points of the report, and the optimistic view they have.

There was one important caveat she mentioned. They assume that the housing markets will not continue to deteriorate, with an eye to the credit indexes in particular. There is one important caveat that we will stress, that the S&P report addresses ONLY what they perceive to be the subprime mortgage debt market.

When pressed by Deidre Bolton, the Bloomberg interviewer, that this seemed like a big assumption and that some have already said that this call is premature, Tanya justified S&P's research conclusions by saying, "Well, this is our best guess."

You can't make this stuff up.

In all fairness to Tanya, who seems like a very nice, intelligent person and an excellent analyst, no one really knows when this will end. And in fairness to the midnight riders of Wall Street, the S&P report was the trigger, but the fuel was provided by reckless piling on the leveraged short side by bear speculators, particularly in the options market. They received a proper beating. Remember, bear markets are triple black diamond trades.


Standard & Poors Sees Light At The End Of The Write-Down Tunnel

3/13/2008 3:02:44 PM A report from Standard & Poor's Ratings Services Thursday that financial companies are nearing the end of the massive asset write-downs sent stocks soaring. These write downs have roiled the stock and credit markets in recent months, and the news boosted investor confidence.

The forecast, titled “More Subprime Write-Downs To Come, But The End Is Now In Sight For Large Financial Institutions,” estimates that write downs could reach $285 billion for the global financial sector, although it noted that the end is in sight for major financial institutions.

“The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation write-downs of subprime ABS," said Standard & Poor's credit analyst Scott Bugie, lead author of the report.

The reluctance of major financial institutions to lend money has frozen credit lines and forced the Federal Reserve to intervene on several occasions in an effort to inject liquidity into the market. Although it states that there is a light at the end of the tunnel, the S&P report warns that investors should expect further write-downs in the near future.

“Right now, market forces are placing further downward pressure on valuations, and we expect to see more write-downs related to these pressures in coming weeks and months,” Bugie said. “We believe that any near-term positive impact of reducing subprime risk in the financial system via increased disclosure and write-downs will be offset by worsening problems in the broader U.S. real estate market and in other segments of the credit markets.”

In an additional report, S&P states that the majority of write-downs related to subprime securities may be behind the banks and brokers that have already announced their full year 2007 results.

“There may be some additional marks to market as market indicators have shown deterioration in the first quarter,” said Standard & Poor's credit analyst Tanya Azarchs. “However, when we dissect the percentage of write-downs taken against various types of exposures, in our opinion the magnitude of some write-downs is greater than any reasonable estimate of ultimate losses.”

Scott Bugie
Managing Director, Financial Services Ratings
Standard & Poor’s Ratings Services (Paris office)

Scott Bugie joined Standard & Poor's in New York in 1987 and currently is a Managing Director in Financial Services Ratings. Based in France since 1990, Scott is the Regional Practice Leader for Financial Institutions Ratings in Eastern Europe, Middle East, and Africa (EEMEA), a position he has held since 1998. Scott is also the European Criteria Officer for Financial Institutions Ratings. Before this, he managed Financial Institutions Ratings for southern Europe. Prior to joining Standard & Poor's, Scott worked for the Federal Reserve Bank of San Francisco for six years as a senior financial analyst in the Department of Supervision, Regulation, and Credit.

Scott holds Master of Business Administration degree in International Finance from the University of California at Berkeley, and a Bachelor of Arts degree in Soviet Studies and Russian Language from Ohio State University. He also studied Russian language and history at the Pushkin Institute in Moscow,

Economic Earthquake Relief for the Wall Street Banks? A Modest Counter-Proposal

In his blog The Economist's View professor Mark Thoma of the University of Oregon writes:

"I’m starting to think that the Fed should drop the term part of the TSLF – trade permanently for risky assets (with the haircut sufficient to provide some compensation for the risk), bonds for MBS, money for MBS, or whatever, and don’t limit trades to banks.

The Fed would act as risk absorber of last resort. Why should it do this? There has been an unexpected earthquake of risk, a financial disaster on the scale of a natural disaster like Katrina, and the government can step in and sop some of it up by trading non-risky assets (money, bonds, etc.) for risky assets at an attractive risk-adjusted price. To limit the amount, this could also be done through auction with a ceiling on how much will be traded, except unlike the current auction it wouldn’t be a repo and it wouldn’t be as limited in terms of who can trade and what can be traded.

What am I missing? Moral hazard and worries about the next time? I’d still fix this first, worry about moral hazard later, perhaps through regulatory changes down the road that (hopefully) limit the opportunities for such behavior."

Now, before you dismiss Dr. Thoma's idea out of hand, first consider that several eminent economic professors and members of Congress have gone even further in espousing this, so it must have merit. Bradford deLong, professor UC Berkeley, and former Treasury Secretary and President of Harvard Larry Summers have recommended saving the banks for the good of the nation, deconstructing any question of moral hazard: Beware Moral Hazard Fundamentalists and The 'Somebody Must Suffer' Caucus Should Chill. Fed Governor William Poole has also weighed in with a pronouncement of papal proportions: The Fed is Without Moral Hazard. William Buiter in The Financial Times The Fed as Market Maker of Last Resort: Better Late Than Never. Even Paul Krugman is flirting a with some good spirited 'face slapping' and perhaps a little 'asset goosing' in order to help us to simply move on. .

But it was the thoughtful and moderate Dr. Thoma who has stumbled on the genuine solution to our current economic crisis.

"Don't Limit the Bailouts to Banks."

Think about this for a minute. An act of God, "an unexpected earthquake of risk, a financial disaster on the scale of a natural disaster like Katrina" has assaulted our nation. Are we going to sit around and let people suffer thirst, heat prostration, and gunfire while seeking shelter, as we did in New Orleans that last time an act of God took away our punchbowl?

Rather than risk a flood of jingle mail, let's allow the Fed to cut a check to EVERY homeowner in the full amount of the house in which they are the full time occupant (no need to encourage speculators). This way, they can be compensated for this act of God that threatens to reduce the value of their net worth. We can use the current assessed value for property taxes as our benchmarks.

But let's not stop there.

What about all the large ticket consumer products that people purchased with their hard earned credit that have simply not met expectations, through absolutely no fault of their own?? That big screen TV that is now outdated because it doesn't support 1080p? (how were WE supposed to know about THAT!). What about those crappy refrigerators, washers and dryers that no long function and are OUT OF WARRANTY? We bought two Maytag appliances (just before they were acquired by Whirlpool) that had major failures within 16 months, and required substantial labor costs to fix them even though they were obviously mis-designed and of poor quailty.

What about people who have suffered the earthquake of bad investing, and can show losses on their brokerage accounts, and carryovers on their income tax forms? Not to mention those whose cars are just not up to snuff, or have been damaged in accidents and are insufficiently insured? Should they be made to suffer? Are we that cruel? Costco will take almost anything back if you have a receipt. Is the United States government less sophisticated than a discount store (with great quality products AND plenty of free samples for the afternoon nosh).

Working with local municipalities we can set up 'economic relief centers' where we can:

TAKE IT ALL BACK! LET'S EXTEND THE BAILOUT TO EVERYONE! THE U.S. (that's US) DESERVES A 'FRESH START.'

And let's not limit it to houses and consumer durables, which are only a percentage of our GDP. What about the service sector? We're a service economy now. What about the man who spends a CONSIDERABLE amount of time and expense and personal energy trying to score with some likely hottie, only to STRIKE OUT! Should he be punished for falling victim to the earthquake of reality? And what about a woman who marries a prince charming, but who turns out to be a shiftless dud? You still have the original marriage certificate? He may have to take a 'haircut' which he probably needs anyway, but why should you have to live with your clouded judgement? Ever gotten stuck with some sour milk, bad dope, a lousy movie that had a good rating? Oh, you didn't realize that the upright conservative you voted for was going to squander your Social Security on crony capitalism? And dare we mention the faux pas of the century...... the Iraq War?

But the banks are too big to fail! And we're not! And if we don't give them what they want, they are going to make us miserable like they do to Third World countries, have done to us before. Oh yeah, before they had the laws changed there were lots of small banks, but they got organized into a few powerful behemoths! That's the difference.

SAVE THOSE RECEIPTS PEOPLE!

Note: The above is satire in the nature of The Colbert Report. It pokes fun at some very intelligent and sincere people who are merely raising some questions worthy of discussion and debate. This is NOT a polemic nor should it be. Just in case you missed the obvious reference in the title and in the florid exaggeration. But there are a lot of folks discussing this in a very serious way, and you need to be aware of it since it has quite a bit of support, and ultimately YOU pay for it with a devalued US dollar and/or higher interest rates on official debt.

And yes, we have come up with a proposal we think is better. At the Crossroads of the Packaged Debt Crisis

SP 500 Bear Market Update: Daily Charts: March 11

We have been posting SP 500 bear market update charts, in which we compare the current 2007-8 bear market with the last bear market and recession which we had in 2000-2002. We have been doing this on the weekly charts.

The problem with the weekly line chart is that it really doesn't catch the intra-week volatility one sees in bear markets, with steep declines and snapback short covering rallies. The advantage of course is that it is easier to see the matching and the 'big picture' of the market moves.

Since intra-week volatility hit a five year record in the Dow moonshot today, we thought it would be useful to show a DAILY chart which compares the same two bear markets in the same way, with time and price percentage roughly mapped to the same values. It just shows the fluctuations with much greater detail than the weekly charts.

Here it is:

US Treasury Debt 'Riskier' Than the German Bund For 'the First Time Ever'

U.S. Treasuries Riskier Than German Debt, Default Swaps Show
By Abigail Moses

March 11 (Bloomberg) -- The risk of losses on U.S. Treasury notes exceeded German bunds for the first time ever amid investor concern the subprime mortgage crisis is sapping government reserves, credit-default swaps prices show.

Contracts on 10-year Treasuries traded at a record 16 basis points earlier today, compared with 15 basis points on German government notes, according to data compiled by BNP Paribas SA. In July, U.S. credit-default swaps were at 1.6 basis points, compared with 2.5 basis points on bunds.

Federal Reserve Chairman Ben S. Bernanke announced plans today to lend as much as $200 billion of Treasury notes in exchange for debt including private mortgage-backed bonds to avert an exodus from the securities that threatens to deepen the housing slump and economic slowdown.

``The U.S. government is not immune from the consequences of the credit crisis,'' said Fabrizio Capanna, BNP's head of high-grade corporate trading in London. ``Support for troubled financial institutions in the U.S. will be perceived as a weakening of U.S. sovereign credit.''

The Fed is trying to ease investor concern that a decline in house valuations and record foreclosures will add to losses for companies including Freddie Mac and Fannie Mae, the two biggest providers of U.S. mortgages. The $4.5 trillion of agency mortgage securities is about the same size as the market for Treasury notes.

Credit-default swaps are used to speculate on the ability of companies or governments to repay their debt and offer a benchmark for pricing securities. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A decline indicates improvement in the perception of credit quality; an increase, the opposite.

Hoarding Treasuries

A basis point on a credit-default swap contract protecting $10 million of debt from default for 10 years is equivalent to $1,000 a year.

Investors and securities firms have hoarded Treasuries during the credit crisis because they are considered the safest and most easily traded securities, reducing yields on two-year notes to the lowest since 2003. Yields on Treasuries have been lower than on German bunds since October.

U.S. yields rose today by the most since May 2004 to 1.77 percent from 1.5 percent on Bernanke's plan.

To contact the reporter on this story: Abigail Moses in London Amoses5@bloomberg.net

Last Updated: March 11, 2008 13:47 EDT