2008 October 01 Wednesday
Credit Crunch Spreading

Car sales are tanking as many potential buyers can't get auto loans. Even Toyota sales are down 32.3%, almost as bad as Chrysler.

Nearly every automaker posted double-digit declines. Sales were down 34.5 percent at the Ford Motor Company, 32.8 percent at Chrysler, 32.3 percent at Toyota and 24 percent at Honda.

Fewer car loans are getting approval.

Loan refusals are at their highest levels since 1984, when the data started to be tracked. CNW Marketing Research, Bandon, Ore., reported that just 63% of auto loans have been approved this year, vs. 83% last year.

Credit gets used to buy many things. This decrease in credit availability for cars is getting repeated in other industries for buying other types of goods and services.

Warren Buffett says he's never seen economic fear this bad. He's 78 years old btw.

Billionaire Warren Buffett, the world's preeminent stock picker, said the U.S. economy is ``flat on the floor'', in a television interview with Charlie Rose that was to air late yesterday on PBS.

Economic Fear

``In my adult lifetime I don't think I've ever seen people as fearful, economically, as they are now,'' said Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway Inc.

AT&T has a hard time selling commercial paper and it is a profitable company.

AT&T Inc. Chairman and CEO Randall Stephenson said Tuesday that his company was unable to sell any commercial paper last week for terms longer than overnight. Commercial paper, which helps lubricate the flow of business operations, is a short-term IOU available to corporations that banks usually know are good for the money.

New securities issues are tanking.

Total securities underwriting fell to $803 billion in the third quarter, down 55% from the second quarter and 43% below the third quarter of last year, according to Thomson Reuters, which tracks new securities issues. Imputed fees fell 41% from the third quarter of 2007, to $4.9 billion, a six-year low.

With commercial-paper markets and interbank lending both sputtering, and an entire week without a single investment-grade bond deal after Lehman Brothers Holdings Inc. filed for bankruptcy protection, some bankers said the credit markets were nearing the kind of "systemic failure" that has long been suggested could be a doomsday scenario for the markets.

Cattle farmers are finding it hard to borrow.

The credit crisis has made it tough for ranchers and farmers to place their "feeder" cattle at feedlots to be fattened on corn and other feed before slaughter, with deposit requirements doubling in some cases to 40 percent of the cost.

New York research firm Innovest Strategic Value Advisors says credit card bad debts will cost about $100 billion in the US in 2009.

“If history is any indicator, there should be an equivalent surge in credit-card charge-offs very soon,” he said. “We forecast first quarter credit-card charge-offs will be $18.6-billion (U.S.) and that the total 2009 charge-off bill will add up to $96-billion.”

Laura Nishikawa, Innovest's consumer finance analyst, said the credit card issuers that will be hurt least in the coming crunch will be those who had the “foresight” to improve their risk management performance during the bull market, even if they sacrificed some growth in the process.

We've been living beyond our means. That's going to stop.

The banking crisis is going global.

In the last two days, governments from London to Berlin have seized or bailed out five faltering banks. In Ireland, where rumors of panicked withdrawals from banks spooked the stock market, the government has offered a two-year blanket guarantee on all deposits and bank debt.

Asia has been less buffeted by the turmoil, though a brief run on a bank in Hong Kong last week brought back dark memories of June 1997, when speculation against the Thai currency sparked a financial crisis that fanned rapidly across Asia, and later to Brazil and Russia.

Several European financial institutions have needed rescue recently.

As Fortis was being rescued, the British government took control of Bradford & Bingley, a medium-sized mortgage lender. The government is nationalizing the £42-billion ($76-billion U.S.) mortgage book, whose default rate was climbing as the British property market soured. Santander, the Spanish banking giant, agreed to buy Bradford & Bingley's £21-billion deposit book and 197 branches for about £600-million.

Two other European banks, Germany's Hypo Real Estate, a property-financing bank, and Iceland's Glitnir Bank, were also offered lifelines as the financial crisis spread like wildfire. Hypo was offered a credit line from a group of local financial institutions. It did not reveal the size of the loan, though media reports put it at about €35-billion. Still, investors abandoned Hypo shares, sending them down 74 per cent to €3.52.

In the US mortgage applications dropped sharply.

In yet another sign of the economic crisis, the Mortgage Bankers Association said Wednesday that mortgage applications plunged 23% last week.

How much further to the bottom?

Share |      By Randall Parker at 2008 October 01 10:30 PM  Economics Financial

Stephen said at October 2, 2008 3:26 AM:

Randall asked: Much further to the bottom?

Probably. We're now in a situation where the markets are sitting and waiting. The US government bailout fund, while enormous, clearly isn't sufficient to finance all potential sources of liquidity shortfall. The US then goes and aggravates the shortfall by not telling the market the criteria to be used in determining who will or won't be supported with bailout money. The end result is that the markets will start to obsess about which bank will or won't get government support, and they'll obsessively test their suspicions by causing a run on the unlucky bank-of-the-day. As the bailout money diminishes the obsession with destructive testing of banks will increase and the runs will happen faster and faster.

This is a situation where doing nothing is infinitely preferable to doing something without 100% commitment.

Stephen said at October 2, 2008 3:27 AM:

Forgive me for the following long quote from Adam Posen's article "The Four Horsemen of Subprime Stupidity":

First, they blew their inventory management. There is a high correlation between the degree of trouble in which these firms find themselves, and the extent to which they kept on their books securitized assets in hopes of capital gains rather than selling them off. This kind of warehousing—practiced egregiously by Freddie Mac and Fannie Mae in direct exploitation of their implicit government guarantees—is no different than that of the grain broker or Beanie Babies distributor who gambles that the future price of their products will be higher than the price currently available in the markets. So the banks got caught short when that wager fell through and they did not rely solely on income from fees and markups on repackaging their inputs.
The second major error was offering specialized products too tailored for specific customers. [...] The same is true for financial firms if they sell a derivative on weekly volatility of acid rainfall on soybeans longer than three centimeters in western Kansas—if Archer Daniels Midland decides not to buy it, the value is zero or something pretty close. So these financial firms just have to grow up and realize that they made a marketing mistake by tailoring products too narrowly, and they have to return to some greater mass production or at least products with more than one potential purchaser.
Third, the banks and mortgage lenders did not live up to reasonable consumer standards in the products they sold to retail investors and borrowers. This has been well-documented and remarked upon, as well as demagogued, so there is no point in belaboring it. But what this means is that borrowers should get rewritten mortgage contracts when what they were sold had a fraudulent design—the approach proposed by Congressman Barney Frank (D-MA)— that is based on the type of product sold, and not on the basis of ability to repay or of potential losses to the lenders (we have limited and direct safety nets for both of those types of distress). That criterion would also direct losses to the appropriate target of moral hazard concern: exploitative behavior.
Finally, the financial firms underestimated the reputational spillovers that tied them to their products. This was most clear with the structured investment vehicles and other “off-balancesheet” vehicles with which they thought that they could maintain credit ties and brand identification, somehow without incurring reputational damage when they got into trouble.

Stephen said at October 2, 2008 3:34 AM:

PS: Here's a nasty thought: What happens when countries can't go to market to finance their current account deficits? What happens when central banks run out of reserves to finance their deficits?? Are we talking Mexico/Argentina type collapses but on a continental scale?

Steve Funk said at October 2, 2008 7:45 AM:

So the auto loan approvals have dropped from 83% to 63%? That isn't so bad. The refusees can save a little more down payment and try for a less expensive model, or a three year old used car. It seemed a little to easy last time I was in the dealer. Before even checking, they assured my wife and I that they could give us at least 95% financing. My daughter, employed but with little credit history, got 100% financing a couple of years ago on a new compact.

kurt9 said at October 2, 2008 8:03 AM:

Why don't they include a ban on sub-prime lending in the bailout bills?

Ned said at October 2, 2008 10:35 AM:

Which is why this may be the election that neither party should want to win. And why I'm pulling for Obama. The blame of the voters for this current mess is appropriately pretty evenly spread - Bush II and Clinton, the current Democratic Congress and the last Republican one. Let's give the Dems full control in Washington and see what they do with it. Let them tell their minority constituents that the good times of easy credit are gone, probably forever. Let them find the money to prop up the failing automakers, banks, insurance companies, etc. Let them tell the unemployed that more immigration is good for the country. Let them put through their tax increases, just like Herbert Hoover did, and see what happens. In 1932, the American voters, with justification, blamed Hoover and the GOP for the evolving economic catastrophe. After almost eight years of FDR and the New Deal, the unemployment rate was still 14.6% in 1940. I don't think the voters will be so patient this time. In a way I feel sorry for Obama - if he makes it to the White House, his presidency already seems doomed to failure and disappointment. With the enthusiasm of his starry-eyed supporters, their is no way that he can live up to their expectations, given the magnitude of the problems he will confront. He already looks like another Jimmy Carter, except Carter inherited a much better economy. But maybe he can turn to Bill Ayers, Jeremiah Wright or Tony Rezko for help.

kurt9 said at October 2, 2008 11:33 AM:

A rather simple solution to the financial problem:



In terms of size, the current problem is a smaller percentage of the GDP than the failed S&L problem was to the GDP of the 80's.

Emerson said at October 2, 2008 7:58 PM:

I'm still not convinced about the severity of the credit problem.
Last night the Senate voted to avoid Amageddon. This morning Swiss Giant USB announced a return to profitability after writing off the rest of its sub-prime "assets."


I believe the bailout can and should be stopped.
The public should demand that the Treasury put up a website listing all of the securities purchases, along with the names of the officers, the board members and the major stockholders of the recipient entities. This is all public information and we have a right to know the identities of the thieves conducting the largest theft in history.
Exposure of the identities might persuade Bernanke, Paulson, and our Senators to conclude that maybe the bailout isn’t really necessary after all.

You could help by posting a demand.

Stephen said at October 2, 2008 9:04 PM:

Emerson, I kind of agree with your first point - few banks are willing to announce a write-off just in case they miss out on a government offer to buy the worthless junk from them. Instead, they just sit on their money, waiting to see what happens.

Absent the hope of a suck at the taxpayers' teat, the market would likely be recovering about now.

Brent Lane said at October 4, 2008 7:20 AM:

"In terms of size, the current problem is a smaller percentage of the GDP than the failed S&L problem was to the GDP of the 80's."

But how much of the growth in GDP since then is based on actual productivity, as opposed to pushing now-worthless paper around and spending the short-term profits? As Steve Sailer observed:

"Essentially, in this decade home prices (primarily in a small number of states, most notably California, Nevada, Arizona, and Florida) inflated to absurd levels, generating trillions in new wealth on paper. Those gains are now gone and won't come back for decades because they were always stupid: there was never enough human capital in California to earn enough money to pay for those houses. . .unfortunately, lots of Californians spent their increased paper wealth on crud, like fancy rims. (And the salesmen who sold the rims purchased fancier tattoos. And the tattoo artists ...) And now the economy and standards of living are going to have to contract as this orgy of real world spending of paper profits is slowly paid off."

Randall Parker said at October 4, 2008 9:08 AM:

Kurt says:

In terms of size, the current problem is a smaller percentage of the GDP than the failed S&L problem was to the GDP of the 80's.

The difference today is in counterparty risk A failing S&L in the 80s held its own mortgage paper. When it died it only cost the FSLIC (and the US Treasury) big bucks. Now when Lehmann failed it tore a big hole in AIG (among others). AIG's failure was about to tear a $20 billion hole in Goldman Sachs (with others taking big hits too). These financial institutions are lined up like dominoes due to the credit default swaps and other financial instruments. What were supposed to be risk reducing financial instruments failed catastrophically because the risks were not independent.

The drop in confidence and trust has become a vicious cycle. If the US government does nothing we'll go into a depression due to the eventual failure of most banks and insurance companies.

Stephen said at October 4, 2008 8:36 PM:

Randall said: What were supposed to be risk reducing financial instruments failed catastrophically because the risks were not independent.

Exactly right.

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