When does the credit “Crunch” become the credit “Crash?”
Short answer: methinks November 2007.
This new “conduit” that the Treasury Dept is encouraging the big banks to form sounds like fools gold. The purpose is to free up the jammed commercial paper market so Citigroup and other big banks don’t get burned by the huge (hundreds of $B) off-balance-sheet Structured Investment Vehicles (SIVs) they’ve been using to invest in mis-rated debt derivatives (like subprime mortgage CDOs). But only the highest-rated debt will be sold into the proposed conduit. This just delays the inevitable day of reckoning when Citibank will have to mark these assets to market. Wouldn’t it be better if they took their medicine now? The risk is pretty big or Treasury wouldn’t be meddling here - credit crunches are much more harmful to an economy than stock market swoons.
The accountants learned a dangerous off-balance-sheet lesson from the Enron fiasco, so they will not play ball this time. (Do you remember Arthur Andersen?) This time it will be the (mis-) ratings agencies (Standard & Poor’s, Moody’s, …) that will be scandalized by the fact that they were paid by the very companies who sold the debt derivatives they (mis-) rated.
I think this will all explode in November, when big chunks of Citigroup-related SIVs will need to be refinanced. I hope I’m wrong, but I’m buying Treasuries and municipal bonds just-in-case. A debt derivatives world that was “awash in cash” only six months ago could become a liquidity-starved debt derivatives desert.
Hopefully the feds will not put the taxpayers on the hook for Citigroup’s risk-taking. (Do you remember the S&L crisis?)
wayt
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4 Responses to “When does the credit “Crunch” become the credit “Crash?””
Ray Abram
December 3rd, 2007
[...] that Citigroup has decided to face the music and take $49B in SIV exposure onto its balance sheet. Thankfully the “conduit” is dead, and other banks around the world will soon enough be forced to face the music too. So I think [...]
Big Thinkr » Blog Archive » When the other shoe drops
December 14th, 2007
I agree with you. The crash is inevitable. I personally believe that there will be some kind of government sponsored bailout (S&L Redux.) In the meantime a lot of good folks will lose their homes. I think that is where the biggest hit to the economy will occur, the site of seeing your soccer mom neighbor being put out in the street will make people think twice about spending extra cash during the holidays. Also, local property taxes will suffer as the tax base shrinks.