C.M.O. 7.28.2009
Credit Market Overview
July 28, 2009
When Bear Stearns collapsed into the arms of J.P. Morgan Chase last year there was a sense that the market had just experienced the event that usually results from the bursting of the big bubbles on Wall St. It became evident a short time later that really big bubbles could have more than one such casualty and a Salem style hunt was on to root out the next unclean soul.
The CDS market, so prominently featured by the media as being evil itself was also described as the primary tool used by the hunters to poke and prod the suspected close enough to the fire to see if they would ignite.
Letting Lehman burn was supposed to show discipline by the government but after being saved by Uncle Sam so many times the market froze when it found out that there wouldn’t always be a net under the high wire. As they say, it’s not what happens to you, it’s how you handle what happens to you.
The thawing of the markets chronicled by the media, again quoting where various credit related spreads were trading, has served a purpose similar to that of the monitor above a patient in the ICU displaying vital signs.
Things are by no means perfect but “spreads” whether the TED, or a given maturity of interest rate or credit default swap are back to around where they were before Lehman died. This is also not to say that caution and trepidation aren’t higher now than they were the last time spreads were at these levels, because they very much seem to be.
The lead article on the front page of yesterday’s WSJ seemed to play on this sense of foreboding with the headline: “Loans Shrink as Fear Lingers”, just what you need on a summer Monday.
Like most things in life however, there are at least two sides to every story and two other articles in yesterday’s paper need to be considered in light of the lead article. Both of these shared the front page of the “C” section and were titled “Banks Profit From U.S. Guarantee” and “Bonds Look to Steal Stocks’ Thunder”.
Now you don’t need me to read the paper for you, although a little help on Monday’s is always appreciated, but after sanding off the veneer papers use to grab your attention I had a much more positive read on these areas than the reporters were possibly hoping for.
Let’s step back and look at the situation; yes, loans are shrinking and are doing so for a number of reasons. The economy is not at its roaring robust best so the demand for credit is down. On top of this the banks are very sick. They chose to keep the really bad loans and securities on their books as opposed to going through the good bank/bad bank process and as a result, as predicted by more than a pundit or two, this has hampered banks’ ability to move forward.
The bond market, however, has taken over for the crippled banks in a major way and 1H09 tallies reported over the weekend showed issuance greater than the first half of 2007 which was pretty much when everyone was dancing the last dance and nobody was thinking about paying the band yet.
The profit being made by the banks due to the credit wrap Sheila Bair has so generously extended was the subject of other article I highlighted above. It is undeniable that the banks have benefited but as I stated those banks are still hiding some very toxic assets on their books and chose to send lobbyists to Washington to have accounting rules changed instead of facing the problems head on.
To the extent that no one wants 10 years of a Japanese style moribund economy there has to be a way for the banks to earn their way out of the hole they dug for themselves and if some cheap financing and a steep yield curve expedite that process than the country and, with apologies for my hegemonic statement, therefore the world will be better off for it.
It would seem to me then, that although the media was trying stoke some fear yesterday, examining what is actually going on from a calm perspective shows that a system that was virtually frozen has indeed thawed and true to its capitalist nature is finding some new ways around what a few short months ago appeared to be an insurmountable problem.
Enjoy the week.
Jim Delaney
