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Are you feeling unwound? It’s childplay

This entry was posted by Helen Thomas on Thursday, March 20th, 2008 at 14:45 and is filed under Capital markets. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

1. Mar 21   20:20 Posted by Practical Risk Manager [report]

   I agree with other commentators who think that Fed’s intervention only prolongs the inevitable. Here is my take on this:
   http://riskyops.blogspot.com/2008/03/fannie-and-freddie-reduces-capital.html

2. Mar 20   16:59 Posted by Monkey [report]

   Private equity companies are more exposed but in general companies have manged to fix very low rates by refinancing on a regualr basis without dramatic increases in leverage multiples (EBITDA/Debt beig mine and the most common market measure). I agree that investors should take the ‘real’ hits and there will be some - there has been some irresponsible lending. What I dont think is fair is forced selling of loans into a market where there are no available buyers as cash gets stuck in the banks and not leant on to brokers/hedge funds etc. Because someone (the banks with access to central bank funds probably) will end up buying the debt v cheaply (yielding at current levels 15-18% in some cases) and massively profiting when they get made whole (as I predict most will) in 5 years time. I could be wrong but I dont think current prices actually represent ‘fair value’ only the value that can be obtained today in a completely broken secondary market.

3. Mar 20   16:17 Posted by Anonymous [report]

   Monkey, I agree with you that cutting the supply of money will exacerbate the unwind. Of course, I believe it is better to end it quickly.

   The fundamentals of all loans are (maybe) generally sound, and (probably) fundamentally unchanged from last July. What has changed is the banks’ appetite for loans which has dimished, so they’re worth less (and, in some cases, worthless). Until banks are forced to price their existing loans to market, the banks won’t trust each other again. And the longer it goes on, the longer until they trust each other again in future. And we trust them.

4. Mar 20   16:07 Posted by White Easter [report]

   I agree with you Monkey. What I am interested in is the deleveraging of the financial system which I would have thought should see a sharp contraction in the derivatives market, upping margins, widening spreads and reducing stock lending might all be helpful. It would go some way towards reducing bubbles which would otherwise burst with more unpleasant consequences. It will squeeze out over extended private individuals and over extended hedge funds. This process may well accelerate if as we have seen, geared instruments are used to threaten the stability of banking institutions. I am pleased to see a bit of an unwind of the commodity bubble and believe the regulators should be squeezing geared investors across the board even if their geared strategies appear to be making money. The other part of the deleveraging which I think is important is for some of the wilder geared up Private Equity businesses to default on their over geared positions. I think that I am right in asserting that many of the UK and US quoted companies entered this turbulence with conservative balance sheets and I personally think that it will start to emerge that they are rather better positioned to weather this storm than some overgeared rivals owned by private equity.

5. Mar 20   15:33 Posted by Monkey [report]

   The unwind has been going on for some months now - the banks already have plenty of incentive to do it and they are doing it. I can’t agree that it would be a good idea to cut the supply of money. What we have in credit (more specifically lev loans) is a negative feedback loop whereby the market is forced to sell assets due to involuntary leverage caused by falling fair values which in turn drives the market lower and creates more involuntary leverage and more sellers and so on an so forth. Cutting the money supply would just exacerbate this issue and in a lot of cases there is nothing fundamentally stressed in the loans that are getting thrown out with the bathwater in the scamble for cash and liquidity. i.e. the company being leant to hasn’t excessively borrowed, is meeting targets, even repaying debt early in some cases out of excess FCF.

6. Mar 20   15:23 Posted by jawdog [report]

   I think central banks are prolonging the Great Unwind agony by making more money available. True, they’re giving banks breathing space until assets achieve realistic valuation levels. But the longer this lasts, the more likely the new lower levels become the new realism.

   Maybe it’s time to cut the supply of money, and encourage banks to unwind their trades. We can’t begin to pick ourselves up until we’ve hit bottom.

7. Mar 20   15:17 Posted by Termômetro II « Notícias do mercado [report]

   […] Termômetro II Mercados de ações em alta hoje nos Estados Unidos com o Dow e o S&P subindo cerca de 1%. As commodities, no entanto, continuam em queda. Conseqüência, aparentemente, dos medos de recessão e da desmontagem de posições alavancadas. […]