While we generally do not like to boast, we will point out that at Recovery Partners we have been informing our clients, colleagues and friends since 2006 that the credit cycle is turning. For some quarters now, the credit markets have provided unmistakable signals that the party is over  and that additional, significant, stresses clearly lie ahead.  

We note that a market report from the Bridgewater Associates was leaked over the weekend that estimates losses from the credit crunch at US1.6 Trn. That is a far bigger number that the USD 1.2 Trn. estimated by Goldmans only two months ago. It is also more than three times the amount of losses announced by banks and brokers to date. As far as we can tell this number does not include the destruction of shareholder wealth caused by tumbling sharemarket and real estate prices. The relevant questions are: (1) If the estimate is in the ballpark, have the markets already discounted this, and if not, are they prepared for the red ink when the wounded and dying financial sector firms begin to own up to the scale of their losses? And (2), whither the economy in the face of such unprecedented negative wealth effects?

In this vein we offer one more observation. You may recall when it the Fed’s rescue package was announced and that the GSE’s in the USA were expected to support the bailout of the subprime mess, we wrote on 24^th March:

The policy measures also include some subterfuge. The GSE’s (Fannie Mae, Freddie Mac etc) are expected to soak up another USD 200 Bn or so of mortgage risk through a relaxation of capital requirements on these institutions. Nothing illustrates more clearly that Fed is running out of rabbits and hats to pull them out of, than the fact that these institutions are now viewed as part of the solution to the mortgage mess in spite of their widely publicized risk management and accounting problems and their reluctance to so far recognize their mark-to-market losses on their mortgage portfolios. A proper investigation of this situation may one day reveal that senior US policymakers and the management of these organisations knowingly allowed these firms to “trade while insolvent” in the vain hope that they could contribute to the bailout ‘plan’.

It now turns out that analysts at Lehman estimate that the GSE’s collectively need to raise USD 75 Bn or so in equity to remain solvent and regulatorily compliant. Surprise, Surprise!!

There is ample grist for the mill: the ongoing world food crisis, Bernanke announcing that the temporary credit support facilities set up by the FED and due to expire in September will be rolled over into 2009; the fact that USA will submit to an FSAP by the IMF (What dat? Check http://www.spiegel.de/international/world/0,1518,562291,00.html: it makes good reading) and the fact that a marked deterioration in inflation performance is only just beginning to make itself felt. There is more but space is short and we don’t have time to list ALL of the problems that we are seeing.

Stay tuned; and please call us direct if you would like more color.

This is going to get worse before it gets better

This entry was posted on Tuesday, July 8th, 2008 at 3:13 pm and is filed under Bankruptcy, Bond Market, Crisis, Loan Losses, USA. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.