Top 10 links: Rescues for AIG, Citi; Defaults worse than Depression; Roubini sees L shaped recession
2nd Mar 09, 11:28am
Here's my top 10 news links from around the Internet in the last day or so. I welcome any additions below. Help, I need more money... The world's largest insurer, AIG, may get another US$30 billion of US government capital in its third bailout since September, Bloomberg reported. Help, I need more money..too Citigroup was rescued for the third time over the weekend as the US government converted US$25 billion worth of bonds into equity to give it a 36% stake in what was once the world's biggest banking group, Bloomberg reported. We'll ask shareholders for the money HSBC plans to cease mortgage and personal lending in the United States as it prepares to raise US$18 billion in fresh capital and cut its dividend, the Wall St Journal reported. We'll keep the money General Electric cuts its dividend for the first time since 1938 as it moved to bolster its balance sheet and try to protect its AAA credit rating, Reuters reported. Moody's sees defaults worse than Depression. Ratings agency Moody's has predicted that defaults on sub-investment grade corporate bonds will be greater than they were during the Great Depression of the 1930s. This in the Telegraph. Here's a taste.
In what will be seen by many as die-cast confirmation that the world economy is plummeting towards an economic and corporate implosion of unprecedented proportions, Moody's said it anticipated a tidal wave of defaults was approaching. It said that in the coming months more than 15pc of speculative-grade bonds and loans - all but the most highly-rated - would default on their debts. This peak is even higher than the peak reached in 1933, when bank after bank throughout America was collapsing, taking hoards of other companies with them. Back then, the default rate peaked at 15.4pc; moreover these companies were former investment grade issuers regarded as more reliable credit prospects than their contemporary counterparts.The Treasury bubble of 2009 Warren Buffett released his annual letter to investors over the weekend, including details on Berkshire Hathaway's profit being down 96% and his comments on the US economy being in a "shambles" for the rest of 2009. He also commented that the US Treasury market was a bubble that was every bit as big as the Dotcom bubble of 2000/01 and the housing bubble of 2006/07. US recession into 2011 Meanwhile, figures out late on Friday showed US GDP fell at an annual pace of 6.2% in the December quarter. Some economists are predicting the US recession will now last through 2010 and beyond, Bloomberg reported. But Graeme Hart is still expanding The AFR.com has a rare interview with Graeme Hart and reports that he is interested in buying Rio Tinto's Alcan aluminium packaging assets. Hmmm. He obviously doesn't have a debt problem then, unlike most other private equity-type buyers. Here's the Bloomberg report. The L shaped recession New York University Professor Nouriel Roubini reckons the US economy may be on the brink of an "L shaped" recession that lasts years. Here's a taste of his Op-Ed contribution in the New York Times.
Even if appropriate aggressive policy actions were undertaken "” monetary and fiscal stimulus, bank clean-up and credit restoration, mortgage debt reduction for insolvent households "” the growth rate would not rise closer to 2 percent until 2011. So this recession may last 36 months. And things could get worse. We now face a 1 in 3 chance that, if appropriate policies are not put in place, this ugly U-shaped recession may turn into a more virulent L-shaped near-depression or stag-deflation (a deadly combination of economic stagnation and price deflation) like the one Japan experienced in the 1990s after its real estate and equity bubbles burst.Here's a few other views in the New York times on when the recession could end. Why we have plenty of real things to fear Alan Kohler at BusinessSpectator has an excellent piece on why there is plenty that is real to fear. Those who say all we have to fear is fear itself are simply not looking at the two biggest threats: massively worthlesss CDOs and a potential Chinese implosion. Here's a taste on CDOs.
But as Warren Buffett wrote in his shareholders' letter published at the weekend, "derivatives are dangerous". And analysts at JPMorgan in New York have now shown just how dangerous. They have sifted through the data to find out what has actually been happening to these CDOs, and the result of their work was published a few days ago in the Financial Times. Between 2005 and 2007, about $US450 billion of CDOs of asset backed securities were issued. Of those, $US305 billion are in a formal state of default, with those underwritten by Merrill Lynch accounting for the largest proportion, followed by UBS and Citigroup. The real problem is what has happened after the default. JPMorgan estimates that $US102 billion of the CDOs have been liquidated; the average recovery rate for the super senior tranches "“ rated AAA "“ has been 32 per cent. For the 'mezzanine' tranches "“ created from mortgage-backed bonds "“ the recovery rate is just 5 per cent. A 95 per cent real loss rate on AAA debt CDOs is not what I would call irrational despondency.You may now need something to help you go to sleep tonight... The problems in China The Australian reports on a worrying buildup of iron ore ships parked off Chinese ports in recent weeks. This suggests China's steel factories have ground to a halt.