Interest Rate Roundup

Monday, February 11, 2008

WSJ: The credit problems are not "well contained" to the residential mortgage arena

I've been saying for quite some time that credit market problems are not isolated to residential mortgages. We saw too many silly private equity deals and too much aggressive LBO lending in recent years, as well as dumb commercial real estate behavior. And now, as the Wall Street Journal notes:

"A widening array of financial-market problems threatens to trigger a new phase in the global credit crunch, extending it beyond the risky mortgages that have cost banks and investors more than $100 billion in losses and helped push the U.S. economy toward recession.

"In the past few days, low-rated corporate loans -- the kind that fueled the buyout boom of recent years -- have plummeted in value. As a result, banks are expected to try to unload some of those loans this week at fire-sale prices.

"Nervous buyers also have retreated in recent days from the market for securities backed by student loans and municipal bonds, roiling some corners of the short-term money markets. Similarly, investors have recoiled from debt backed by commercial real estate, such as office buildings."

Can the Fed plug all these holes in the dike with its aggressive interest rates cuts? That's the question before Wall Street. My sense is that we need a longer purging process -- meaning more write-downs, more capital raisings, and so on -- before the stage can be set for a healthy recovery in the financial system.


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