Bloomberg is reporting Company Default Risk Rises as Recession, Lending Concerns Mount.
The risk of companies defaulting rose after reports showing contraction in the U.S. service industry and a tightening of lending standards by banks.
Benchmark credit-default swap indexes in the U.S. and Europe reached the highest in two weeks, a sign of eroding investor confidence in corporate creditworthiness. Contracts tied to the bonds of student lender SLM Corp. rose the most in two weeks after Standard & Poor’s cut its credit rating two levels. Real- estate broker Realogy Corp. moved further into distressed levels on concern it won’t be able to weather the housing-market slump.
Financial companies are reluctant to lend because they may face losses exceeding $265 billion on securities linked to subprime mortgages, Standard & Poor’s said last week. Banks also are saddled with about $220 billion of high-yield, high-risk loans and bonds, according to Barclays analysts. Most of the debt was committed to fund leveraged buyouts.
“If lending standards do not loosen then this is very bad news for the rest of the economy,” said Jim Reid, head of fundamental credit research at Deutsche Bank AG in London.
My take: If lending standards loosen headed into a hurricane force consumer led recession, banks are fools. How much more capital impairment does Reid want? It’s no wonder banks are in the trouble they are in if that is the type of thinking coming out of bank credit departments.
Banks are putting a stranglehold on credit
The Fed says Banks are getting much stricter on loans.
Banks are raising their credit standards for mortgages, consumer loans and commercial real estate loans at a pace never seen in the 17-year history of the Fed’s quarterly survey of senior bank loan officers, the Fed said.
Plain-vanilla business loans were also much harder to obtain, the Fed said.
Banks expect more delinquencies and charge offs for most types of loans to consumers and businesses, the survey said. Banks said they were tightening their lending standards in response to weaker economy, reduced tolerance of risk, and decreased liquidity in secondary markets.
Banks are requiring more disclosures, more collateral and a higher interest rate before approving loans, the survey said. Demand is plunging for many types of loans, especially for residential mortgages and commercial real estate loans.
For consumers, banks are tightening up on all types of mortgages, not just subprime loans. And banks are less willing to approve consumer installment loans.
Tightening By The Numbers
- More than 80% of banks, the largest percentage ever, said they had tightened lending standards for commercial real estate loans.
- About a 33% of banks were tightening their standards for commercial and industrial loans, the highest rate in more than five years.
- Over 50% of banks tightened standards for prime mortgages, by far the highest percentage in the 17-year history of the survey.
- More than 80% of the banks tightened their standards for nontraditional loans, including jumbo loans and other loans that do not conform to standards set by Fannie Mae and Freddie Mac.
- About 70% of banks that offer subprime mortgages tightened their lending standards
- More than 90% of the banks responding to the survey said they do not offer subprime loans at all.
- About 60% of banks tightened their standards for home equity lines of credit
Charts From Fed Survey
Inquiring minds may wish to look at charts of actual results from the Fed survey on credit lending.
Silver State Helicopters Sinks Into Oblivion
Silver State Helicopters filed for Chapter 7 bankruptcy Monday, about 24 hours after suddenly closing its doors at more than 30 locations nationwide. The move left about 750 employees out of work and roughly 2,700 flight students on the hook for thousands of dollars in student loans.
According to a former employee who requested anonymity, the shutdown was triggered after student loan lender Citibank told the company on Thursday that it would no longer make loans to its students.
Pete Lown, a Georgia lawyer representing 40 former Silver State Helicopter students from Arizona who sued the company, said it was just a matter of time until it collapsed. He called the business a Ponzi scheme that relied on an influx of new students to support the existing students.
Now the company’s 200 helicopter pilots are flooding a job market that doesn’t have enough spots for them, he said.
Look for more horror stories like this as the recession strengthens. Loose credit and bull market fraud go hand in hand. No one cares as long as share prices are going up. The fraud shows up when the supply of greater fools dries up. Unfortunately many innocent lives get wrecked in the process.
MBIA Back In Spotlight
Bloomberg is reporting MBIA’s AAA Rating Placed Back Under Review by Fitch.
MBIA (MBI) Inc.’s AAA bond insurance ranking was placed back under review for a downgrade by Fitch Ratings less than a month after being affirmed with a stable outlook.
Fitch will likely raise the amount of capital it requires, a move that would put “further downward pressure on the ratings” of Ambac Assurance Corp. (ABK), CIFG, Financial Guaranty Insurance Co., MBIA and Security Capital Assurance Ltd., according to the statement. Ratings on $2.4 trillion of debt the industry guarantees would be thrown into doubt if the downgrades expand.
“Right now the AAA ratings for MBIA, Ambac and FGIC simply aren’t justified,” said Janet Tavakoli, president of Chicago- based Tavakoli Structured Finance, said in an interview with Bloomberg Television. “They simply don’t have the capital.”
Bank ratings may be cut on bond insurer woes
It only seems fitting that if the monolines’ ratings are cut, that bank ratings would be cut right along with it. Indeed, MarketWatch is reporting Bank ratings may be cut on bond insurer woes.
“Bond insurers are suffering as a result of their roles as guarantors of mortgage-related securities, and downgrading them could affect all markets in which they are active, including the municipal bond, commercial mortgage-backed securities, and other structured finance areas,” Tanya Azarchs, a credit analyst for S&P;, wrote in a note to investors. “In turn, dislocation in those markets could affect banks.”
“We believe that the specific, identifiable effect on banks may be significant and, in a few cases, could lead to downgrades. Large global institutions have direct exposure to the bond insurers in a number of ways,” Azarchs said.
If there are big downgrades, banks that have hedged CDO positions with guarantees from bond insurers may suffer more write-downs. The ratings agency pointed to several banks that have recently increased loan loss reserves and could have existing CDO risk, including Merrill Lynch (MER), Citibank (C) and CIBC.
Fellow ratings agency Fitch Ratings said today that it may downgrade the more than $220 billion of CDOs that it currently assesses by as much as five levels. Fitch created new risk-defining protocols after determining it did not accurately assess dangers associated with these types of assets. It lowered ratings in November on more than $67 billion of mortgage-linked CDOs, effectively naming many of them junk.
The formerly hot CDO market has since slowed down to a trickle, with only one created in the U.S. in 2008.
Only one CDO created this year. The annualized pace is 10-12 for the entire year. Clearly Bernanke cannot cajole lending at 3%. Will 2% work? 0%?
Banks are not lending for one of two reasons
- They are unable (Bank balance sheets are too impaired with non performing loans).
- They are unwilling (Banks do not see any risks worth taking).
With the US Service Sector in Recession and banks unable or unwilling to lend, inflation fears are simply unfounded. Those who see inflation out of this mess simply do not understand what inflation is. Faith in the Fed’s ability (and willingness) to generate inflation will be the last bubble to pop.
Mike “Mish” Shedlock
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