Report: U.S. Banks To Curb Lending, Call in Existing Loans
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America faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, according to a report by Lombard Street Research.
The group said the fast-moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the American sub-prime mortgage market, and the vast nexus of collateralized debt obligations known as CDOs.
“Excess liquidity in the global system will be slashed,” it said. “Banks’ capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the U.S. hard landing.”
The group’s global strategist, Charles Dumas, said the failed auction of assets seized from one of the Bear Stearns funds by Merrill Lynch had revealed the dark secret of the CDO debt market. The sale had to be called off after buyers took just $200 million of the $850 million mix.
“The banks were not prepared to bid over 85% of face value for CDOs rated ‘A’ or better,” he said.
“God knows how low the price would have dropped if they had kept on going. We hear buyers were lobbing bids at just 30%.
“We don’t know what the value of this debt is because the investment banks shut down the market in a cover-up so that nobody would know. There is $750 billion of dubious paper out there in the form of CDOs held by banks that have a total capitalization of $850 billion.”
American property writer Paul Muolo described the Bear Stearns crisis as the “subprime Chernobyl,” saying the bank had created a “cone of silence.”
Abandoned by fellow banks, Bear Stearns has now put up $3.2 billion of its own money to rescue one of the funds, a quarter of its capital.
This is the biggest bail-out since the Long-Term Capital Management crisis in 1998, which Bear Stearns refused to join at the time. Bear Stearns is now alone, a case of rough justice being served.
The warning comes as fresh data from the U.S. National Association of Realtors shows a glut of unsold homes. The median price fell for the 10th month in a row to $223,700, down almost 14% from its peak in April 2006. This is the steepest drop since the 1930s. The Mortgage Lender Implode-Meter that tracks the American housing markets claims that 86 major lenders have gone bankrupt or shut their doors since the crash began.
