|
Fear of risk is sending investors into retreat as cold
feet become the factor.
The widening fallout in the U.S. mortgage industry has reminded investors
of a risk they had forgotten: the fear of risk itself. Corporations are paying
higher interest rates on their bonds, some private-equity firms are having
trouble raising money to close big purchases, and the stock market has lost
7 percent of its value in less than two weeks -- all mainly because
of an exodus from risk.
"I would characterize it as a loss of excessive risk appetite," said
Ian Lyngen, an interest-rate strategist at RBS Greenwich Capital. "There
is a lot more apprehension about layering on riskier assets."
The meltdown of this comparatively small segment of the U.S. economy is
contributing to a much bigger and broader issue: Lenders around the world
are growing scared to lend.
"It is making people pull in their tolerance for risk," said Doug Sandler,
Wachovia's chief equity strategist. But Sandler thinks investors had
been way too eager take on risk without enough compensation.
"We have the strongest global economy I've seen in my business
lifetime today," Treasury Secretary Henry Paulson -- the former
CEO of Goldman Sachs -- told reporters in Beijing yesterday.
"There has been a change in attitude," said Eric Thorne, investment
strategist at Bryn Mawr Trust. "We were in a situation a couple of
weeks ago where there wasn't much that investors were worried about.
It's more a psychological impact of the lending environment in general."
Two mortgage insurers said this week a $1 billion partnership created to
invest in mortgage debt may now be worthless for that very reason.
The partnership -- C-Bass LLC -- insists nothing fundamental
has changed and the credit quality in its portfolio remains intact. The only
problem, it claims, is that it cannot come up with the cash to repay the
skittish lenders who have demanded their money back.
"It's just a broader fear," said Grubb & Ellis's Bach. "That
credit disruption has spread to the point where people are reluctant to make
loans. What started in subprime mortgage has sort of transferred into other
kinds of debt right now."
Key Ideas
- Loss of excessive risk appetite
- Lenders around the world are growing scared to lend
- There has been a change in attitude
Oddly enough this change in risk appetite is occurring in what Paulson claims
is "the strongest global economy I've seen in my business lifetime today".
Then again if things can't get any better, they only have one way to go don't
they? Certainly liquidity is not going to get any better than it was early
this year when senseless leveraged buyouts could be funded with ease. It's
also interesting that there are record numbers of foreclosures in the strongest
global economy ever.
With those rising foreclosures, attitudes of consumers about consumption
are changing as well. In spite of solid growth in the 2ns quarter, consumer
spending is weakening.
Consumer spending grew just 1.3 percent in the second quarter, a dramatic
falloff from the first quarter's 3.7 percent and the 3.4 percent growth in
2006.
Capital spending rose a lackluster 2.3 percent in the second quarter, a
performance that looks good only in comparison to the anemic 0.3 percent
growth in the first quarter or the decline of 4.9 percent in the last quarter
of 2006.
Capital outlays were "on the weak side," said Merrill Lynch's Rosenberg,
and, despite the higher-than-expected GDP reading, "we still believe that
the weak handoff into the third quarter remains intact."
Rosenberg expects a sluggish 1.7 percent growth rate in the third quarter.
C-Bass Liquidity Problems
 The
Wall Street Journal is reporting a liquidity crisis for sea bass. Oops that's
C-Bass not sea bass. Thankfully there's still plenty of water for our friend
there on the left.
On the other hand C-Bass
is liquidity challenged and flopping around like a wet fish on dry land
hoping to find water as the following statements show:
C-BASS LLC, an affiliate of MGIC Investment Corporation (MTG) and Radian
Group Inc. (RDN) today issued the following statement in response to the
announcements made last night by MGIC and Radian regarding the liquidity
challenges faced by C-BASS.
While nothing fundamentally has changed at C-BASS, like many other firms
in the industry, the current severe state of disruption in the credit markets
has caused C-BASS to be subject to an unprecedented amount of margin calls
from our lenders. The frequency and magnitude of these calls have adversely
affected our liquidity. To address this, C-BASS is in advanced discussions
with a number of investors to provide increased liquidity and is exploring
all options to mitigate the liquidity risk in this difficult market.
At the beginning of 2007, we had $302 million of liquidity, representing
greater than 30% of our capital of $926 million. During the first 6 months
of 2007, a very tumultuous time in the subprime mortgage market, C-BASS'
disciplined liquidity strategy enabled the company to meet $290 million in
lender margin calls. During the first 24 days of July alone, C-BASS met an
additional $260 million of margin calls, representing greater than a 20%
decline in the lender's value. We believe that nothing justifies this substantial
amount of margin calls received in such a short period of time, particularly
as there has been no change in the underlying fundamentals of our portfolio.
"There has been no change in the underlying fundamentals of our portfolio."
That statement seems laughable at first glance but it's possible. Let's see
if this slight revision expresses the idea: "The underlying fundamentals
of our portfolio were god awful from the beginning and they are still god awful
today. What has changed is the willingness of lenders to slosh water on our
gills. Liquidity is drying up and that is affecting our stock price."
MTG
RDN
C-Blass claims a "disciplined liquidity strategy" enabled them to meet a
total of $556 million in lender margin calls.
Two questions:
- Is it possible to repeatedly have disciplined margin calls?
- How much more discipline can C-Bass take?
|
HOME
Printer Friendly
eMail Article
Top of Page
