The world is starved for credit.
I know it doesn’t seem that way what with huge stimulus packages in 2009, massive expansion of the money supply in the United States, China, and Europe, and hand-over-fist expansion of the balance sheets at the U.S. Federal Reserve and the European Central Bank.
But all that may not be enough to make up for the trillions in credit that the market for securitized debt supplied every year—until the 2007 financial crisis. That’s what Gillian Tett argues in a must-read column in today’s (June 24) Financial Times.
Here are the numbers behind Tett’s argument.
From 2000 to mid-2007 the market for securitized debt (that’s debt such as mortgages or credit card receivables that’s been pooled, repackaged, and then sold by the originators of the debt to investors looking for cash flow and income so that the originating institutions can recoup their cash and lend it ouit again) grew like Topsy. By mid-2007 the volume of securitized debt had grown to $8 trillion, according to Citigroup. The markets for securitized debt accounted for more than half of all credit created in some sectors. (Housing would be one obvious example.)
Since then these markets have collapsed. Last year only $4 billion in one form of securitized debt—collateralized debt obligations (CDOs)—were sold in comparison to $520 billion in 2006. So far this year sales of securitized debt in Europe add up to $37 billion. Before the crisis annual sales were more than $750 billion.
Tett points out that central banks have stepped into void to replace the securitized debt markets. For example, the U.S. Federal Reserve has bought $1.25 trillion in mortgage-backed debt securities. The European Central Bank has been just as active. Before the financial crisis, Euro Zone banks sold 95% of their securitized debt to investors. Right now those private markets account for less than 5% of securitized debt sales.
For me two big picture questions emerge from Tett’s column.
First, is one reason for the continued weakness of the global recovery, a lack of global credit as a result of the shutdown in the markets for securitized debt?
Second, if the markets for securitized debt remain so frozen, and central banks are starting to cut back on their buying of securitized debt, aren’t we in danger of starting another global credit crunch?
As long as our cub prez continues to threaten, All smart cash will stay on the sidelines. Please vote responsibly.
USDAportfolio,
It’s good if you own stock in the company being bought out, not so good if you own the company paying too much. We saw that with STD yesterday.
Today on CNBC I heard that private equity firms are sitting on $500 billion in cash. I checked the internet to see how this figure compares to historical cash levels. I found this article by AP, accompanied by a bar graph on the NY Times site:
http://www.nytimes.com/2010/06/24/business/24private.html
As can be seen, the cash levels are near their peak and much higher than the 2003-2006 average.
This is not exactly surprising to me. Given the uncertainty around making investments over the last few years, these firms simply sat on the money and waited.
However, as the article explains, the life span associated with private equity funds (typically 10 years) is adding increasing pressure to quickly invest this cash. In fact, competition between funds is creating a bidding wars in some cases.
I have posted before on why I believe M&A activity will be picking up over the rest of the year, simply from high cash balances at corporations and nice valuations at takeover targets. Add to this pressure private equity funds, eager to get in on the action.
The result is very good for shareholders, who benefit when takeover prices are higher than market prices.
we had enough of that securitized debt crap in the last 10 years. maybe people are tired of making people like james cayne rich and fed jumping in and saving them when the going gets tough.
Not another one!
Oh, no.
brucegolden:
http://jutiagroup.com/2009/11/03/banks-biggest-buyers-of-u-s-treasury-securities-bank-of-america-nyse-bac-jpmorgan-chase-nyse-jpm-citigroup-nyse-c-wells-fargo-nyse-wfc/
Is this enough or should I post more references?
Sliman – which bank is taking the free money and buying treasuries?
The problem is too much debt. The banks are holding impaired loans they do not want to right off. So they take free money from the government and then buy treasuries for a fool proof profit.
My guru says .. ( ya my guru) he says that the money must be held out of the economy in order to keep the velosity of money down.
If they keep the velosity of money down, they can print massive amounts of money, without causing inflation.
That is why we are not seeing inflation now, they are “printing” into a stagnant economy.
So long as unemployment is high, no one can spend, if there is no spending there is no demand, if there is no demand, there is no compitition for goods and services, and if there is no compitition, then there is no way to drive prices up.
Result low inflation,, and all generated on the backs of the working class.
The anecdotal evidence I’ve heard definitely agrees with the idea that small businesses are hamstrung by a lack of credit right now. I know a man who, despite a proven track record of running a successful startup business venture, is finding it next to impossible to get his new venture off the ground because he cannot get credit. Whereas before the problem was that banks were much too lax in their lending practices, now the problem is that they are much too restrictive.
looks to me like investors have little interest in securitized debt. Is there a form of seciritized debt that might be attractive to you and other investors?
One thing I have heard in articles and posts by small businesses, is that they can’t get credit. Before they might have used inventory as collateral, now the banks now the only thing they look at is cash flow. So if a business gets a big order they might not be able to fill it because they don’t have the money to buy the inventory to make the product.