www.nytimes.com/2007/08/05/weekinreview/05norris.html
Only two months ago, it seemed as if almost any company could borrow money at low interest rates. What had seemed like a contained problem, involving home loans to people with poor credit, has suddenly mushroomed into a rout that threatens to make life difficult for everyone who needs to borrow money. Home buyers are likely to pay more for mortgages, and some with less-than-pristine credit or an inability to come up with a down payment may find they no longer can borrow at all. A German bank had to be rescued by other banks last week, because it had speculated in securities backed by American mortgages. One of the biggest mortgage lenders in the United States collapsed, and another said it would drastically scale back its lending because it cannot find investors willing to finance the loans it makes. The volume of new high-yield bonds also known as junk bonds fell by 89 percent in July. The market for loans to highly leveraged companies has almost dried up. Standard & Poors counts $35 billion in corporate loans that have been delayed or canceled, including loans to finance the leveraged buyout of Chrysler. The Chrysler deal will go through, because banks had promised to lend the money if others would not take the loans. But from now on there are likely to be fewer corporate takeovers, and those that do take place are likely to be at lower prices.
The magnitude of risk was significantly underappreciated. Hedge funds, which had been major buyers of complicated securities that financed leveraged loans and mortgages, have also pulled back.
Mr Bruner is the co-author of a book on the Panic of 1907, to be published next month, and he sees similarities between then and now. It was a time marked by the rise of new financial institutions and new financial instruments, he said. It marked the end of a period of extraordinary growth, from 1895 to 1907. The credit market has changed drastically in recent years, as banks grew far less important and credit rating agencies like Standard & Poors and Moodys became the essential players in the new financial architecture. Many loans, whether mortgages or loans to corporations, were financed by selling securities. It was the credit agency ratings that determined if those securities could be sold, and deals were structured to meet the criteria set by the agencies. The agencies figured that even very risky loans were unlikely to cause big losses, and so most of the securities backed by loans to poor credit risks could get AAA ratings the highest available as long as those securities had first claim on loan payments. Investors bought the securities thinking they were completely safe, and some did so with borrowed money. Now, however, there is fear even about those securities. The rating agencies are changing their criteria for the loans, and many investors no longer trust the ratings. The markets are very panicked and illiquid, said Mike Perry, the chief executive of IndyMac Bank, the ninth largest mortgage lender in the first half of this year, as he announced plans last week to curtail lending sharply. It is very difficult, he said, to find buyers even for the AAA securities. This is what we would characterize as the first correction of the modern neo-credit market, said Mr Malvey of Lehman Brothers. Weve never had a correction with these types of institutions and these types of instruments. It now seems likely that the rating agencies, and investors, were lured into a false sense of security by the lack of defaults. With the value of homes, and companies, rising, it was usually possible for a borrower in trouble to refinance the debt or, at worst, sell the home or business. Now, there is less confidence that rising prices will bail out lenders, and there is doubt not only about the quality of old loans but also about important parts of the new financial system. The markets seem to be expressing concern about the performance and the stability of hedge funds and, to a lesser extent, private equity funds, said Mr Bruner. The credit squeeze is coming at a time when the American economy seems to be growing, despite problems in the housing market, and the world economy is strong. The underlying economy is very healthy, said Henry Paulson, the Treasury secretary, as he visited China last week. In fact, it is during good economic times that credit standards are most likely to be so lax that bad loans are made. Financial panics dont happen during depressions, said James Grant, the editor of Grants Interest Rate Observer. Not all panics lead to economic downturns, of course, and if this one continues pressure will grow on the Fed and other central banks to lower the short-term interest rates they control and thus stimulate the economy. But central banks do not always determine what happens in credit markets. The Fed tightened in 2005 and 2006, but creative financing on Wall Street blunted the impact, said Robert Barbera, the chief economist of ITG, a research firm. The collapse of that option in the last 90 days means the entirety of that tightening is arriving now, and there is a violent tightening going on. The insurance companies and pension funds that are the traditional buyers of bonds always have money coming in, from interest payments and bond maturities, as well as from new business, and they will have to put it to work. The history is that lenders move in great caravans between two extreme points, which we can call stringency and accommodation, said Mr Grant, recalling how hard it was for companies to get loans as recently as 2002. Lenders will move back to accommodation one day, he said, but for now it appears that risky borrowers,whether of the corporate or individual variety, will discover that its much more difficult to find someone to lend money to them.
Tips To find reference information about the words used in this article, double-click on any word, phrase or name. A new window will open with a dictionary definition or encyclopedia entry.
|
http://csua.com/feed/