Archive for June 9th, 2008
Credit crisis expands, hitting all kinds of consumer loans
Credit crisis expands, hitting all kinds of consumer loans
By: By Kevin G. Hall | McClatchy Newspapers via Rubber
WASHINGTON — The credit crisis triggered by bad home loans is spreading to other areas, forcing banks to tighten credit and probably extending the credit crisis that’s dragging down the economy well into next year, and perhaps beyond.
That means consumers are going to have an increasingly difficult time getting bank loans for car purchases, credit cards, home equity credit lines, student loans and even commercial real estate, experts say.
When financial analyst Meredith Whitney wrote in a report last October that the nation’s largest bank, Citigroup, lacked sufficient capital for the risks it had assumed, she was considered a heretic.
However, Whitney was proved correct: Citigroup pushed out its CEO, sought foreign investors and slashed its dividend. Her comments now carry added weight on Wall Street, and she has a new warning for ordinary Americans: The crisis in credit markets is far from over, and it increasingly will affect consumers.
“In fact, we believe that what lies ahead will be worse than what is behind us,” Whitney and colleagues at Oppenheimer & Co. wrote in a lengthy report last month about threats faced by big national banks, including Bank of America, Wachovia and others.
The warning is scary considering what’s already behind us in the credit crisis — the resignation or firing since last August of CEOs at almost every large commercial or investment bank; the Federal Reserve lowering its benchmark lending rate by 3.25 percentage points; a Fed-brokered deal to sell investment bank Bear Stearns; and weekly auctions of short-term loans from the Fed worth billions of dollars to keep credit markets functioning.
Whitney argues that the worst is still ahead because the financial tools that enabled credit to flow so freely to homeowners and consumers for most of this decade are likely to remain in a prolonged shutdown indefinitely.
“After years of inherently flawed underwriting, banks face the worst yet of the credit crisis — over $170 billion in write-downs and charge-offs from consumer loans,” Whitney told McClatchy. The same kind of losses from housing may be ahead for credit extended to consumers, she said.
At the heart of the nation’s lending boom from 1996 to 2006 was a process called securitization. In housing, this process involved pooling mortgages for sale to investors as special bonds called mortgage-backed securities. Monthly mortgage payments were also pooled and served as the return to investors.
Securitization meant that most home loans no longer sat on a bank’s balance sheet. Instead, they were sold into a secondary market, where they were sliced and diced in a process that was supposed to spread investment risk a mile wide and an inch deep.
For every dollar of mortgage loans that banks kept on their balance sheets since 2000, another $7 of these loans were sold to the secondary market and securitized. This led to the industry joke that “a rolling loan gathered no loss.” Risk was passed along to the next holder of the debt. Securitization added what bankers call liquidity, a fancy term for having more money on hand to lend.
Now, the structured finance that enabled Americans to borrow cheaply has gone away, at least in the housing market.
“With that source of liquidity removed, the sheer number of buyers who can qualify for mortgages and therefore buy homes will decline dramatically,” Whitney told McClatchy. “It stands to reason, therefore, that less demand and more supply will drive home prices down well below current expectations.”
In addition, interest is waning in other areas of lending where securitization has also been common — car loans, credit cards, home equity lines of credit, student loans and even commercial real estate. It means that lending in those areas is growing tighter.
“There are still many areas where people aren’t going to be able to do transactions that they were able to a year ago,” said Sean Davys, managing director of the Securities Industry and Financial Markets Association (SIFMA), the trade association for big finance. “We do expect that it will take a significant amount of time for the market to return to any sense of normalcy. What’s your reference to normalcy? It’s going back several years, not just a couple of years.”
These other areas of lending are suffering through a buyer’s strike. Investors just don’t have much interest in buying anything whose underlying asset are pooled loans.
Because there are no buyers, banks are taking an accounting hit as they mark down the value of the securitized mortgages they own, and Whitney believes they’ll have to do so with other types of securitized loans, such as car loans and credit card debt.
That’s likely to result in a large pullback in bank lending. She forecasts tighter lending standards, banks with increasingly limited capital, a growing need for banks to set aside more money to offset losses and tough new federal regulations to protect borrowers, which would reduce lending further.
If the positive side of securitization was that it let banks lend more by passing loans into a secondary market, the inverse is now true. Banks are less willing or able to lend — they collectively set aside more than $10 billion to shore up their balance sheets in the first quarter of 2008. That’s meant that consumers must pay more to borrow to buy a car or fix a home, and it’s harder to get loans.
“There are a lot of businesses and individuals that are going to find that their access to credit is a lot more limited than it used to be and it’s a lot more expensive,” said Mark Vitner, a senior economist with Wachovia, a large national bank headquartered in Charlotte, N.C. “And the reason why is the lessened ability to securitize these loans and sell them in the secondary market. That lack of liquidity is being priced into all new loans.”
Higher borrowing costs are on top of tighter lending. The Whitney report estimated that by 2010 credit card issuers would withdraw more than $2 trillion in credit that they’ve been extending to consumers.
“We’re already seeing examples of people seeing their credit limits reduced,” said Joseph Ridout, a spokesman for Consumer Action, a consumer rights group based in San Francisco.
More troubling, he said, some banks are doubling interest rates on customers who are current on payments but considered a credit risk because of changes in their credit profile. The hikes apply to credit-card debt already racked up.
Federal Reserve Chairman Ben Bernanke worried about the state of the credit markets in a June 3 speech. Financial institutions already have taken $300 billion in write-downs and credit losses, he said, noting that “balance sheet pressures and the relatively high cost of new bank capital have reduced the willingness and ability of these institutions to make markets and extend credit.”
Translation: Expect less credit for consumers and businesses and higher borrowing costs.
It’s a bad omen for a sluggish economy struggling to stay out of recession.
Still, not everyone is so downbeat.
Bert Ely, a banking consultant who was prominent during the savings and loan crisis, thinks that once the economy rebounds, banks will look a lot stronger. That’s because the loans they’re bringing back on their balance sheets will look better over time.
“Many of the losses financial institutions have reported will essentially reverse out (and become accounting gains) . . . that’s why large institutions have been raising capital to hang on to these securities so they don’t have to sell them at what would be unrealistically high losses,” said Ely.
He nonetheless agreed with Whitney that “there are still some serious issues with securitization” and the credit markets are unlikely to bounce back within two or three years.
US/IRAN: Fearing Escalation, Pentagon Fought Cheney Plan
US/IRAN: Fearing Escalation, Pentagon Fought Cheney Plan
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Analysis by Gareth Porter
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WASHINGTON, Jun 6 (IPS) – Pentagon officials firmly opposed a proposal by Vice President Dick Cheney last summer for airstrikes against Iranian Revolutionary Guard Corps (IRGC) bases by insisting that the administration would have to make clear decisions about how far the United States would go in escalating the conflict with Iran, according to a former George W. Bush administration official.
J. Scott Carpenter, who was then deputy assistant secretary of state in the State Department’s Bureau of Near Eastern Affairs, recalled in an interview that senior Defence Department (DoD) officials and the Joint Chiefs used the escalation issue as the main argument against the Cheney proposal.
McClatchy newspapers reported last August that Cheney had proposal several weeks earlier “launching airstrikes at suspected training camps in Iran”, citing two officials involved in Iran policy.
According to Carpenter, who is now at the Washington Institute on Near East Policy, a strongly pro-Israel think tank, Pentagon officials argued that no decision should be made about the limited airstrike on Iran without a thorough discussion of the sequence of events that would follow an Iranian retaliation for such an attack. Carpenter said the DoD officials insisted that the Bush administration had to make “a policy decision about how far the administration would go — what would happen after the Iranians would go after our folks.”
The question of escalation posed by DoD officials involved not only the potential of the Mahdi Army in Iraq to attack, Carpenter said, but possible responses by Hezbollah and by Iran itself across the Middle East.
Carpenter suggested that DoD officials were shifting the debate on a limited strike from the Iraq-based rationale, which they were not contesting, to the much bigger issue of the threat of escalation to full-scale war with Iran, knowing that it would be politically easier to thwart the proposal on that basis.
The former State Department official said DoD “knew that it would be difficult to get interagency consensus on that question”.
The Joint Chiefs were fully supportive of the position taken by Secretary of Defence Robert Gates on the Cheney proposal, according to Carpenter. “It’s clear that the military leadership was being very conservative on this issue,” he said.
At least some DoD and military officials suggested that Iran had more and better options for hitting back at the United States than the United States had for hitting Iran, according to one former Bush administration insider.
Former Bush speechwriter and senior policy adviser Michael Gerson, who had left the administration in 2006, wrote a column in the Washington Post Jul. 20, 2007 in which he gave no hint of Cheney’s proposal, but referred to “options” for striking Iranian targets based on the Cheney line that Iran “smuggles in the advanced explosive devices that kill and maim American soldiers”.
Gerson cited two possibilities: “Engaging in hot pursuit against weapon supply lines over the Iranian border or striking explosives factories and staging areas within Iran.” But the Pentagon and the military leadership were opposing such options, he reported, because of the fear that Iran has “escalation dominance” in its conflict with the United States.
That meant, according to Gerson that, “in a broadened conflict, the Iranians could complicate our lives in Iraq and the region more than we complicate theirs.”
Carpenter’s account of the Pentagon’s position on the Cheney proposal suggests, however, that civilian and military opponents were saying that Iran’s ability to escalate posed the question of whether the United States was going to go to a full-scale air war against Iran.
Pentagon civilian and military opposition to such a strategic attack on Iran had become well-known during 2007. But this is the first evidence from an insider that Cheney’s proposal was perceived as a ploy to provoke Iranian retaliation that could used to justify a strategic attack on Iran.
The option of attacking nuclear sites had been raised by President Bush with the Joint Chiefs at a meeting in “the tank” at the Pentagon on Dec. 13, 2006 and had been opposed by the Joint Chiefs, according a report by Time magazine’s Joe Klein last June. After he become head of the Central Command in March 2007, Adm. William Fallon also made his opposition to such a massive attack on Iran known to the White House, according Middle East specialist Hillary Mann, who had developed close working relationships with Pentagon officials when she worked on the National Security Council staff.
It appeared in early 2007, therefore, that a strike at Iran’s nuclear programme and military power had been blocked by opposition from the Pentagon. Cheney’s proposal for an attack on IRGC bases in June 2007, tied to the alleged Iranian role in providing both weapons — especially the highly lethal explosively formed projectiles (EFPs) — and training to Shiite militias appears to have been a strategy for getting around the firm resistance of military leaders to such an unprovoked attack.
Although the Pentagon bottled up the Cheney proposal in inter-agency discussions, Cheney had a strategic asset which could he could use to try to overcome that obstacle: his alliance with Gen. David Petraeus.
As IPS reported earlier this week, Cheney had already used Gen. David Petraeus’ takeover as the top commander of U.S. forces in Iraq in early February 2007 to do an end run about the Washington national security bureaucracy to establish the propaganda line that Iran was manufacturing EFPs and shipping them to the Mahdi Army militiamen.
Petraeus was also a supporter of Cheney’s proposal for striking IRGC targets in Iran, going so far as to hint in an interview with Fox News last September that he had passed on to the White House his desire to do something about alleged Iranian assistance to Shiites that would require U.S. forces beyond his control.
At that point, Adm. Fallon was in a position to deter any effort to go around DoD and military opposition to such a strike because he controlled all military access to the region as a whole. But Fallon’s forced resignation in March and the subsequent promotion of Petraeus to become CENTCOM chief later this year gives Cheney a possible option to ignore the position of his opponents in Washington once more in the final months of the administration.
- Gareth Porter is an investigative historian and journalist specialising in U.S. national security policy. The paperback edition of his latest book, “Perils of Dominance: Imbalance of Power and the Road to War in Vietnam”, was published in 2006.
Thousands clash with police in Egyptian bread riot
Thousands clash with police in Egyptian bread riot
Thousands clash with police over flour rations in town in northern Egypt
SALAH NASRAWI
AP News
Thousands of demonstrators fought with police after a protest over flour rations in a town on Egypt’s Mediterranean coast, a security official and state media said Sunday.
The state-owned daily Al-Ahram said some 8,000 protesters sealed off the main Cairo-Mediterranean highway for seven hours Saturday and burnt tires to stop traffic. Police fired tear gas and arrested dozens to disperse the crowd,
A security official said police were questioning 87 suspects.
The protesters were angered by the decision of authorities in Burullus to stop distributing subsidized flour directly to residents and instead deliver it exclusively to bakeries, the official said on condition of anonymity because he is not authorized to give statements.
Fishermen in Burullus prefer to bake a type of bread suited to long fishing voyages instead of buying the standard subsidized bread from bakeries.
There have also been accusations by the government that people are selling the subsidized flour on the black market for a profit, leading to shortages.
Like much of the rest of the world, Egypt has been wracked by rising food prices and stagnant wages, resulting in protests and demonstrations.
There has also been a shortage of the subsidized bread relied on by vast segments of this impoverished country of 76.5 million.
Some 10 people were reported killed since the beginning of the year after scuffles in bread lines.
