Fed: Subprime Worse Than The Attack On The World Trade Centre
The Federal Reserve's knee-jerk reaction to the problems with mortgagees who aren't repaying their loans, and the fear of recession, indicates it thinks these events are worse for the economy than the attack on the World Trade Centre in New York on September 11, 2001. As the Wall Street Journal points out, the 0.75% decline in its federal funds rate to 3.5% is the single biggest cut since August 1982. This is not only ridiculous, but moves the Fed even further away from the job it's supposed to be doing: keeping a lid on inflation.
The Fed statement says it cut rates "in view of a weakening of the economic outlook and increasing downside risks to growth", and adds that "appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks."
Admirable. If only this was its job. Now, I also used to think that central banks should lower interest rates to boost flagging economies, and I was an ardent critic of the European Central Bank several years ago for doggedly targetting inflation in some EU member states while ignoring the fact that the high interest rates it used as a tool to do this were choking off the economies of other EU member states.
Looking at the Treasurys market, investors had been factoring in a fall in interest rates anyway. But not of this magnitude. Besides, the central bank's job is to keep inflation in check, not to give in to punch-drunk investors whenever the market returns to more reasonable valuations. Does Mr Bernanke give chocolates to his grandchildren each time they ask for it, lest they go hungry before the next meal?
We congratulate Fed governor and Federal Open Markets Committee member William Poole for "voting against" the rate cut because he "did not believe that current conditions justified policy action before the regularly scheduled meeting next week". That's right. The Fed's next scheduled meeting is only than a week away. Like I said: the 0.75% cut is a knee-jerk reaction.
Particularly telling was the comment from Treasury Secretary and Bush appointee Henry Paulson, who is quoted in the same WSJ article as saying "This is very constructive and I think it shows this country and the rest of the world that our central bank is nimble and can move quickly in response to market conditions". With an election in the air, he would say that. One wonders whether Fed Chairman Ben Bernanke and his committee received any phonecalls with "words of encouragement" from the Treasury Secretary.
Perhaps he is hoping a rate cut now will deliver election victory to the Republicans later this year, in the same way a rate hike during last December's election campaign in Australia robbed the Conservative Government of its re-election chances there.
Mark Laudi
The Fed statement says it cut rates "in view of a weakening of the economic outlook and increasing downside risks to growth", and adds that "appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks."
Admirable. If only this was its job. Now, I also used to think that central banks should lower interest rates to boost flagging economies, and I was an ardent critic of the European Central Bank several years ago for doggedly targetting inflation in some EU member states while ignoring the fact that the high interest rates it used as a tool to do this were choking off the economies of other EU member states.
Looking at the Treasurys market, investors had been factoring in a fall in interest rates anyway. But not of this magnitude. Besides, the central bank's job is to keep inflation in check, not to give in to punch-drunk investors whenever the market returns to more reasonable valuations. Does Mr Bernanke give chocolates to his grandchildren each time they ask for it, lest they go hungry before the next meal?
We congratulate Fed governor and Federal Open Markets Committee member William Poole for "voting against" the rate cut because he "did not believe that current conditions justified policy action before the regularly scheduled meeting next week". That's right. The Fed's next scheduled meeting is only than a week away. Like I said: the 0.75% cut is a knee-jerk reaction.
Particularly telling was the comment from Treasury Secretary and Bush appointee Henry Paulson, who is quoted in the same WSJ article as saying "This is very constructive and I think it shows this country and the rest of the world that our central bank is nimble and can move quickly in response to market conditions". With an election in the air, he would say that. One wonders whether Fed Chairman Ben Bernanke and his committee received any phonecalls with "words of encouragement" from the Treasury Secretary.
Perhaps he is hoping a rate cut now will deliver election victory to the Republicans later this year, in the same way a rate hike during last December's election campaign in Australia robbed the Conservative Government of its re-election chances there.
Mark Laudi
Labels: Ben Bernanke, Federal Reserve, interest rate cut, September 11, subprime, William Poole
Banks: Home Market Should Be Priority
Investors were generally thankful recent sub-prime loan related losses among Singapore banks weren't higher. At a time when US banks consistently announced billions and billions of dollars worth of exposure, and the CEOs of Merrill Lynch and Citigroup resigned, Singapore banks were generally unscathed. But at a time when Singapore's economy is booming and yet many legitimate local businesses still can't get loans, one has to ask why in the world Singapore banks would have any exposure to sub-prime loans at all! Our argument is: DBS, UOB and OCBC should focus on loaning money to Singapore businesses, rather than throwing money at Collateralised Debt Obligations (CDOs).
The earnings statements from the banks tell the story:
DBS reported third quarter enterprise loans of S$22.5 bln, up around 10% from the year earlier. But corporate and investment banking rose to S$45.6 bln, from S$32.7 bln. This is more than double the enterpise amount. DBS's CDOs were S$2.36 bln. None of them were in default, it says, but it took an S$85 mln charge for sub-prime concerns.
"A huge sigh of relief", is how CIMB's Kenneth Ng characterised DBS' earnings in a report dated October 29.
Similar story at OCBC, which had S$270 mln in exposures to the subprime issue, and it took a provision of S$221 mln in case these turned bad.
These exposures certainly aren't large, and the banks are sufficiently prudent to disclose their exposures (although – as we blogged previously – it took DBS two tries to get it right). But it does make you wonder why the banks even have such exposures.
As mentioned, the same earnings announcements documented how strong loan growth had been. Wouldn't it make more sense to lend money to Singaporean SMEs, which continually complain about how difficult it is to get a loan from a bank, than to be "investing" (read, gambling) on subprime Collateralised Debt Obligations. After all, what are sub-prime CDOs, than a funky financial product invented by investment bankers to make money out of Americans who should never have been granted a home loan in the first place.
Mark Laudi
To comment on this blog, visit the Investor Central Blog.
Should Singapore banks have ever invested in US subprime loans?
Tell us...
Yes, they need to diversify their risks across a broad spectrum of assets, including subprime CDOs
No, they should not have invested in subprime loans.
No, they should have put that money towards Singapore SMEs instead
The earnings statements from the banks tell the story:
DBS reported third quarter enterprise loans of S$22.5 bln, up around 10% from the year earlier. But corporate and investment banking rose to S$45.6 bln, from S$32.7 bln. This is more than double the enterpise amount. DBS's CDOs were S$2.36 bln. None of them were in default, it says, but it took an S$85 mln charge for sub-prime concerns.
"A huge sigh of relief", is how CIMB's Kenneth Ng characterised DBS' earnings in a report dated October 29.
Similar story at OCBC, which had S$270 mln in exposures to the subprime issue, and it took a provision of S$221 mln in case these turned bad.
These exposures certainly aren't large, and the banks are sufficiently prudent to disclose their exposures (although – as we blogged previously – it took DBS two tries to get it right). But it does make you wonder why the banks even have such exposures.
As mentioned, the same earnings announcements documented how strong loan growth had been. Wouldn't it make more sense to lend money to Singaporean SMEs, which continually complain about how difficult it is to get a loan from a bank, than to be "investing" (read, gambling) on subprime Collateralised Debt Obligations. After all, what are sub-prime CDOs, than a funky financial product invented by investment bankers to make money out of Americans who should never have been granted a home loan in the first place.
Mark Laudi
To comment on this blog, visit the Investor Central Blog.
Should Singapore banks have ever invested in US subprime loans?
Tell us...
Yes, they need to diversify their risks across a broad spectrum of assets, including subprime CDOs
No, they should not have invested in subprime loans.
No, they should have put that money towards Singapore SMEs instead
Labels: DBS, OCBC, Singapore, subprime, UOB
Effects of Subprime finally beginning to show
Multi-billion dollar write-downs, quarterly losses in the tens of millions of billions of dollars instead of large profits that investors around the world and Wall Street are used to seeing, and boardroom tussles and resignations. Welcome to the aftermath of subprime.
After a summer and early autumn that seemed to show that some of Wall Street's biggest firms had survived the storm (keep in mind the Dow also set a record high as well), the flood waters are receding and the real damage is now showing. To use a midwestern analogy that is all too familiar for people in my flood prone home state of Ohio "the levy held and kept the main part of town safe, but now the water is going down and the damage is worse than we thought" (for added affect, try saying that in your best southern accent).
Earnings season seemed to be the revealing and deciding factor in all this subprime drama. After months of thinking we had made it through the unprecedented saga of subprime, everyone had to do a quick reality check when banks started reporting huge, multi-billion write-downs of bad loans, and major financial behemoths like Merrill Lynch were suddenly reporting enormous quarterly losses not seen in ages at the company.
Subprime also claimed its first boardroom casualty this week as Merrill Lynch CEO Stan O'Neal will retire, apparently under pressure after Merrill's abysmal earnings. It should be noted though that he will get about US$161.5 mln in retirement benefits though.
Even Singaporean lenders, for the most part untouched by the subprime saga -or so one thought- are feeling the heat. While not as severe as what its US counterparts are experiencing, the proof was in the pudding in the earnings announcements. UOB saw a nice 8.2% rise in its net profit for Q3, but it came in short of analysts' expectations thanks to...you guessed it! Subprime issues in the U.S.
So it doesn't seem we are out of the woods yet with subprime, and to use a rather morbid analogy, "the flood waters may be receding but the casualties are gonna surface."
Let's hope the damage is minimal...
ArchivesAfter a summer and early autumn that seemed to show that some of Wall Street's biggest firms had survived the storm (keep in mind the Dow also set a record high as well), the flood waters are receding and the real damage is now showing. To use a midwestern analogy that is all too familiar for people in my flood prone home state of Ohio "the levy held and kept the main part of town safe, but now the water is going down and the damage is worse than we thought" (for added affect, try saying that in your best southern accent).
Earnings season seemed to be the revealing and deciding factor in all this subprime drama. After months of thinking we had made it through the unprecedented saga of subprime, everyone had to do a quick reality check when banks started reporting huge, multi-billion write-downs of bad loans, and major financial behemoths like Merrill Lynch were suddenly reporting enormous quarterly losses not seen in ages at the company.
Subprime also claimed its first boardroom casualty this week as Merrill Lynch CEO Stan O'Neal will retire, apparently under pressure after Merrill's abysmal earnings. It should be noted though that he will get about US$161.5 mln in retirement benefits though.
Even Singaporean lenders, for the most part untouched by the subprime saga -or so one thought- are feeling the heat. While not as severe as what its US counterparts are experiencing, the proof was in the pudding in the earnings announcements. UOB saw a nice 8.2% rise in its net profit for Q3, but it came in short of analysts' expectations thanks to...you guessed it! Subprime issues in the U.S.
So it doesn't seem we are out of the woods yet with subprime, and to use a rather morbid analogy, "the flood waters may be receding but the casualties are gonna surface."
Let's hope the damage is minimal...
Labels: Merrill Lynch, subprime, UOB
January 2006 February 2006 March 2006 April 2006 May 2006 June 2006 July 2006 August 2006 September 2006 October 2006 November 2006 December 2006 January 2007 February 2007 March 2007 April 2007 May 2007 June 2007 July 2007 August 2007 September 2007 October 2007 November 2007 December 2007 January 2008 February 2008 March 2008 April 2008 May 2008 August 2008 September 2008 October 2008 November 2008 January 2009
