Anew banker-in-chief for a troubled economy
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Bloomberg
Oluşturulma Tarihi: Ocak 21, 2009 00:00
NEW YORK / SAN FRANCISCO - Barack Obama, the new president of the United States, is overtaking an economy shattered by crisis.
The U.S. economy has little chance of recovering from what may prove to be its worst recession since World War II unless President Barack Obama shows he can get banks to lend money again.
Since the Bush administration and Congress last year approved the $700 billion Troubled Asset Relief Program that injected capital into Bank of America, Citigroup and JPMorgan Chase, individuals and companies aren’t getting any of it as fourth-quarter lending by the biggest banks plummeted. The asset-backed market, which is supposed to enable banks to keep lending by transforming loans into tradable securities, remains frozen, leaving would-be lenders unable to package and sell mortgages, credit-card debt and auto loans.
After reporting more than $1 trillion of market losses and writedowns, banks are adding billions of dollars to reserves amid a 16-year high in unemployment and two years of falling home prices. Investor confidence has waned, sending an index of bank stocks to a 13-year low last week. Obama, 47, can’t expect relief from the Federal Reserve, which already cut its main interest rate to as low as zero.
"It’s a day-one, minute-one problem for the new administration," said Stuart Eizenstat, a former deputy U.S. Treasury secretary. "It’s difficult to understand with the degree of oversight exactly how those banks got into such deep water. The point now is to keep them liquid, get the balance sheets in order and to get them to start lending."
Real rates
The mortgage market has contracted even as the Fed reduced interest rates. The average 30-year fixed mortgage rate fell below 5 percent this month for the first time since Freddie Mac started keeping records in 1971. The real rate that banks charge customers is the highest in two decades.
That’s because the spread between 30-year mortgage rates and 10-year Treasury yields is about 2.6 percentage points, up from 1.6 percentage points in 2003 and 1.5 percentage points in 1993. The difference was about 3.3 percentage points in June 1986.
The failure of banks to pass along savings is hurting the economy that’s already in the deepest recession since the 1980s. Companies slashed payrolls in 2008 by almost 2.6 million, the most since 1945. The unemployment rate climbed to 7.2 percent in December, the highest level in 16 years. The economy will contract 1.5 percent this year, according to the a Bloomberg survey.
"We are in the middle of the economic Pearl Harbor," said billionaire investor and Berkshire Hathaway Chairman Warren Buffett during an interview last week. "Now we have to get mobilized to win the war, which we will."
With lenders tightening standards, as few as 50 percent of applications are resulting in mortgages this month, compared with an average of about 70 percent during the past 18 months, according to data compiled by analysts at Credit Suisse Group.
Request from Treasury
Unfreezing credit "is the single most important thing," said Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley, in an interview.
The Treasury is demanding monthly reports from the banks that received the most capital in the government’s rescue program. Neel Kashkari, the official who administers TARP, wrote to Citigroup, Bank of America and 18 other banks on Jan. 16, seeking figures on business and consumer loans. Treasury also wanted details on purchases of mortgage-backed and asset-backed securities, according to documents obtained by Bloomberg.
Only government-supported programs, with stricter standards than private lenders once required, have kept home-mortgage lending from shutting down in the U.S., according to newsletter Inside MBS & ABS, published in Bethesda, Maryland.
The securitization rate, or amount of new mortgage securities relative to new loans, rose to 78 percent in the first nine months of 2008, the newsletter’s data show. Issuance of bonds with government backing accounted for 99 percent of the total. In 2006, lenders such as banks kept 32 percent of loans and private mortgage securities accounted for 56 percent of sales.
Sales of bonds backed by auto-loan and credit-card payments plummeted 40 percent in 2008 as investors fled to the safety of U.S. government debt, Merrill Lynch reported.
There have been no public sales of such debt in 2009. The gap, or spread, on top-rated credit card-backed debt maturing in three years is about 4.75 percentage points more than one-month Libor, compared with 0.5 percentage point a year ago, Merrill data show.
Banks have been able to raise cash by selling government-backed bonds through the Federal Deposit Insurance Corp.’s Temporary Liquidity Guarantee Program. About $115 billion of such debt has been sold since Nov. 25, according to data compileed by Bloomberg.
Since the Bush administration and Congress last year approved the $700 billion Troubled Asset Relief Program that injected capital into Bank of America, Citigroup and JPMorgan Chase, individuals and companies aren’t getting any of it as fourth-quarter lending by the biggest banks plummeted. The asset-backed market, which is supposed to enable banks to keep lending by transforming loans into tradable securities, remains frozen, leaving would-be lenders unable to package and sell mortgages, credit-card debt and auto loans.
After reporting more than $1 trillion of market losses and writedowns, banks are adding billions of dollars to reserves amid a 16-year high in unemployment and two years of falling home prices. Investor confidence has waned, sending an index of bank stocks to a 13-year low last week. Obama, 47, can’t expect relief from the Federal Reserve, which already cut its main interest rate to as low as zero.
"It’s a day-one, minute-one problem for the new administration," said Stuart Eizenstat, a former deputy U.S. Treasury secretary. "It’s difficult to understand with the degree of oversight exactly how those banks got into such deep water. The point now is to keep them liquid, get the balance sheets in order and to get them to start lending."
Real rates
The mortgage market has contracted even as the Fed reduced interest rates. The average 30-year fixed mortgage rate fell below 5 percent this month for the first time since Freddie Mac started keeping records in 1971. The real rate that banks charge customers is the highest in two decades.
That’s because the spread between 30-year mortgage rates and 10-year Treasury yields is about 2.6 percentage points, up from 1.6 percentage points in 2003 and 1.5 percentage points in 1993. The difference was about 3.3 percentage points in June 1986.
The failure of banks to pass along savings is hurting the economy that’s already in the deepest recession since the 1980s. Companies slashed payrolls in 2008 by almost 2.6 million, the most since 1945. The unemployment rate climbed to 7.2 percent in December, the highest level in 16 years. The economy will contract 1.5 percent this year, according to the a Bloomberg survey.
"We are in the middle of the economic Pearl Harbor," said billionaire investor and Berkshire Hathaway Chairman Warren Buffett during an interview last week. "Now we have to get mobilized to win the war, which we will."
With lenders tightening standards, as few as 50 percent of applications are resulting in mortgages this month, compared with an average of about 70 percent during the past 18 months, according to data compiled by analysts at Credit Suisse Group.
Request from Treasury
Unfreezing credit "is the single most important thing," said Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley, in an interview.
The Treasury is demanding monthly reports from the banks that received the most capital in the government’s rescue program. Neel Kashkari, the official who administers TARP, wrote to Citigroup, Bank of America and 18 other banks on Jan. 16, seeking figures on business and consumer loans. Treasury also wanted details on purchases of mortgage-backed and asset-backed securities, according to documents obtained by Bloomberg.
Only government-supported programs, with stricter standards than private lenders once required, have kept home-mortgage lending from shutting down in the U.S., according to newsletter Inside MBS & ABS, published in Bethesda, Maryland.
The securitization rate, or amount of new mortgage securities relative to new loans, rose to 78 percent in the first nine months of 2008, the newsletter’s data show. Issuance of bonds with government backing accounted for 99 percent of the total. In 2006, lenders such as banks kept 32 percent of loans and private mortgage securities accounted for 56 percent of sales.
Sales of bonds backed by auto-loan and credit-card payments plummeted 40 percent in 2008 as investors fled to the safety of U.S. government debt, Merrill Lynch reported.
There have been no public sales of such debt in 2009. The gap, or spread, on top-rated credit card-backed debt maturing in three years is about 4.75 percentage points more than one-month Libor, compared with 0.5 percentage point a year ago, Merrill data show.
Banks have been able to raise cash by selling government-backed bonds through the Federal Deposit Insurance Corp.’s Temporary Liquidity Guarantee Program. About $115 billion of such debt has been sold since Nov. 25, according to data compileed by Bloomberg.