Comment on the Crisis by Calculated Risk
by Tom on September 17, 2008
in Market Musings, banks
Rather than adding much (and I don’t think I can say it better), I’m just going to put excerpts of what CR wrote last night. At the bottom, there will be a link to the entire article. Well worth reading:
it might seem like the credit crisis is spiraling out of control.
And there are definitely more problems to come……
Many banks will fail – especially small and regional banks with excessive concentrations in construction & development (C&D) and commercial real estate (CRE) loans. And the recession is getting worse with rising unemployment, declining personal consumption expenditures, declining industrial production and falling business investment. Economies of many other countries are in or close to recession. The Fed even cautioned on slowing U.S. exports today for the first time……
If action had been taken in 2004 or 2005 to curtail the loose lending practices, the problem wouldn’t be so severe, but the crisis would have still occurred. The damage had already been done……
Unfortunately the U.S. failed to prevent this crisis, and now we have no choice but to pay the price for the cleanup…..
The good news is the U.S. is finally taking the necessary steps towards eventually resolving the crisis……
it has been obvious for some time that the U.S. Government had to explicitly guarantee the debt of Fannie and Freddie, or face a complete shutdown of the housing and mortgage markets. At least this guarantee was accomplished with the shareholders (both common and preferred) taking losses before the U.S. taxpayers…..
Since I have viewed a guarantee as inevitable, I consider this a necessary step toward the eventual resolution of the credit crisis……
Second, Secretary Paulson’s no bailout approach to Lehman removes some moral hazard from the process……
an A.I.G. collapse posed significant risks to the system, and the Fed was stuck with a dilemma and no good alternatives. I believe a collapse of A.I.G. would probably have been worse than the rescue……
Third, one of the reasons the credit crisis has lingered (in addition to house prices still being too high) is that a number of financial institutions have been unwilling to adequately mark down their assets. The reason for this reluctance is obvious as Lehman just discovered; too many write downs can lead to bankruptcy.
In addition, the economic problems will exacerbate the credit problems for some time – probably all through 2009 as Ken Lewis noted yesterday: But progress is being made. I am viewing the events of the weekend as a constructive development in the process of reestablishing equilibrium in the capital markets. This change in approach will hasten the processes of deleveraging, capital raising and asset price discovery which are needed to stabilize financial institutions and get capital flowing back into the sector again….
Clearly we are closer to the eventual bottom today, than say in 2005 when very few people believed a housing bust and credit crunch were on the horizon. Unfortunately the bottom still isn’t in sight…..
“The first glimmer of light”…..written by an investor who has been correct on the credit crisis
But unlike observers that believe this only marks the end of the beginning, I believe there is a chance that these events mark the beginning of the end of the crisis.
Tom here again….
Read the entire article at Calculated Risk.
