Bottom or No Bottom for US Financial Markets

Posted on CNBC, Credit Crunch to Drag On Despite Efforts by the Fed, the interesting comments was the last bit of the article, which featured some comments from George Soros.

• In an exclusive interview to be broadcast on CNBC on “Closing Bell” Wednesday, billionaire investor George Soros told Maria Bartiromo that the markets have hit a significant but temporary bottom.
  
  “I don’t think we are halfway through the fallout because to think what happens in the financial markets doesn’t affect the real economy is nonsense,” Soros said.
  
  If this credit crunch, as some have claimed, is indeed the greatest financial crisis since the Great Depression in the 1930s, then Fed will continue to cut interest rates – perhaps to as low as 1 percent. The federal government is probably not though either. Lately, there appears to be a growing inevitability to a broad government bail out of troubled homeowners and even mortgage lenders.
  
  “A lot of air has been let out of the balloon, but we don't know how much more there is “ says Resler of Nomura International. “This whole crisis underscores the conceit of many in the markets that we can pretend to understand the properties of complex asset structures when they have cyclical sensitivities and we have not experienced those since they were created.”

And the following article from Times certainly agrees with what's said. Bank Write-Downs: No End Yet

• And despite the stock market's most fervent hopes, there are few signs that the write-downs are anywhere near finished. In a March 25 research note, Oppenheimer analyst Meredith Whitney predicted an additional $13 billion for Citigroup in the first quarter, $4 billion for Bank of America, nearly $3 billion for JP Morgan, and $1.5 billion for Wachovia. An April 1 report from Morgan Stanley and the consultancy Oliver Wyman estimated that investment banks alone have $60 to $100 billion more to go in 2008.
  
  All of which raises the question: why is this taking so long and when will it stop?
  
  At the heart of the issue is the unendingly discussed fact that house prices continue to fall after their long and unsustainable run-up. In January, home prices in 20 U.S. metropolitan markets fell for the 13th consecutive month, according to the S&P/Case-Shiller home-price index. And as much as the federal government may try to help pressure or legislate mortgage lenders into rewriting the terms of home loans that have gone bad, that sort of action will likely help individual homeowners exponentially more than the financial system as a whole.
  
  Part of that is because the value of mortgage-backed assets has largely decoupled from the value of mortgages themselves. As credit markets around the world have seized up — in all sorts of lending, not just home loans — investor perceptions have taken an outsized role in valuing these sorts of securities. "It's less important if people are paying their mortgages back, and more important if the market thinks they'll pay them back in the future," says Nick Studer, who runs the corporate and institutional banking practice at Oliver Wyman and co-authored the study with Huw van Steenis of Morgan Stanley. The more people worry, the less they're willing to pay for assets, and the less they're worth in the market — which is what counts in accounting. Eventually, Studer says, we'll start seeing write-ups, as securities valuations more realistically align with their underlying worth.
  
  But don't hold your breath. Charles Morris, a lawyer, former banker, and author of the impeccably-timed The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash, says even once banks work through revaluing their subprime loan assets, there will be plenty of other mark-downs to be had. Financial outfits have moved on to marking down securities backed by slightly-better-than-subprime Alt-A and jumbo home loans, but beyond that are still securities tied to commercial mortgages, take-over debt, credit cards and auto loans. Deflating home prices don't come into play there, but the general paralysis of credit markets worldwide, not to mention the specter of recession, does. "It's like Chinese water torture," says Morris. "Drip, drip, drip."
  
  Why not just get it over and done with all at once? If banks tried to do that they would, as Morris says, "not have any equity capital left." And so we are left with what we have seen since October: a wave of write-downs, encouraging the notion that the worst may be behind us, and then another wave. Beyond the balance sheet, that means months, and even years, of profits that banks booked are being erased.
  
  In between bouts of write-downs, banks do what they can to shore up their funding, like procuring cash infusions from sovereign wealth funds abroad and other investors. On March 31, Lehman Brothers raised $4 billion by selling new convertible preferred shares of stock; UBS made a similar move to the tune of $15 billion. Then there is the Federal Reserve, which has started lending directly to investment banks (which have very happily borrowed) in order to instill confidence in the system. And if the federal government will take mortgage-backed paper as collateral, how bad could it be, really?
  
  The answer, it seems, is worse.

However, some are rather optimistic, UBS, Lehman Raisings May Signal Rout Is Nearing End

• While investors agree that more writedowns and share-price swings are inevitable, Kevin Rendino, who runs the $6.5 billion BlackRock Basic Value Fund in Plainsboro, New Jersey, found cause for encouragement.
  
  ``You want to get all the bad assets off the balance sheets, and the banks are in the process of doing that,'' Rendino said in an interview. ``You're seeing the write-offs, the charges and the replenishment of the balance sheets, so all that's good.''
  
  The U.S. Federal Reserve cut its main lending rate on March 18 by three-quarters of a percentage point to 2.25 percent. The central bank also started a lending program for brokers, which is similar to the so-called discount window used by commercial banks, after the run on Bear Stearns.
  
  ``You can't ignore what the Fed has done,'' Rendino said. ``It's been a game-changing set of events over the last couple months. It doesn't make the bad assets worth more, but it's going to be good for banks and it creates a better environment for financials going forward.''

And here is Bill Gross investment paper for April 2008, When I'm Sixty-Four
and the following is his comments regarding the great Bear bailout in which regulators are strongly defending the rescue package by saying that low prices were sought for The Bear Sale

• No Bailouts?
  Politicians – especially those on the Republican side of the aisle – are adamant about not using taxpayers’ funds to bailout Wall Street or housing speculators, or whoever the current devil may be. The public seems to nod in agreement while at the same time not noticing that their watch is being lifted or their pocket being picked. Let’s see: Twelve months ago the yield on your money market fund was 5%+ but your next statement will probably feature something closer to 2%. Did your money market fund (which in aggregate approaches 3 trillion dollars) experience any capital gains in the process? Absolutely not. So it looks like your (the taxpayer’s) contribution to the bailout of banks, or Florida condominium speculators can at least be quantified: 3% foregone interest per year on whatever you own. In addition, as pointed out in a previous section, the reflationary (inflationary) implications of all this suggest your contribution to the bailout will be even greater, since you’ll likely wind up paying higher prices for many of the things you’ll buy.
  
  Ah, government sometimes works in mysterious ways. There’s more than one way to have taxpayers bailout Wall Street!