Sighs of relief amid the gasps and groans

Amy Scott Aug 10, 2007

Sighs of relief amid the gasps and groans

Amy Scott Aug 10, 2007


KAI RYSSDAL: Let’s pick up on that last thing Bob said. That the credit squeeze and fears of worse are responsible for stock market losses, hedge fund blow-ups. Even that there’s a recession out there on the horizon someplace. If that’s true, why are some people on Wall Street breathing a sigh of relief right now? Marketplace’s Amy Scott has the answers.

Amy Scott: Things had clearly gotten out of hand.

CHRISTOPHER WHALEN: We were in a period of national, collective insanity.

Christopher Whalen is managing director of Institutional Risk Analytics. It’s a risk-management consulting firm. He says as the housing bubble kept inflating, banks were making so much money selling mortgages, and mortgage defaults were so low, that they forgot all about risk.

WHALEN: My little West Highland terrier could probably have gotten a mortgage, if I had dreamed up a Social Security number for Lucy.

A similar thing happened in the corporate world. Profit-hungry banks and investors lent more money, more cheaply than they had in years. And just as in the mortgage market, they took on more and more risk. Some banks signed over money without insisting on the traditional safeguardsa€¦called covenants that protect lenders.

Then all of a sudden . . .

[Sound of car braking, tires squealing.]

Around late June, everything ground to a halt. More and more subprime borrowers found they couldn’t pay their mortgages. Investors who’d been buying mortgage-backed securities started losing money. A few prominent funds collapsed.

Mike Bacevich invests in corporate debt for Hartford Investment Management. He says suddenly nobody would touch any kind of risky debt.

MIKE BACEVICH: It all circles back to the subprime mess. It’s a combination of weak lending standards and excessive leverage by both subprime lenders and certain hedge funds. And that’s resulted in a number of big well-publicized failures. And I think that uncertainty, the feeling that another shoe might drop, has been the reason behind the sudden market-wide aversion to risk.

In the past six weeks, investment banks have delayed dozens of financing deals because they can’t find investors. Now it’s tough for anyone to get money, from big corporations to people buying homes. Scott Minerd oversees about $24 billion in bond investments for Guggenheim Partners Asset Management. He says he hasn’t seen such a tight credit market since the savings and loan scandal in the 1980s.

SCOTT MINERD: I think that unless the Federal Reserve does something before the end of the year, that it’s very highly likely that we would go into a recession as a result of the current credit squeeze.

The Fed is pumping more money into the market to keep borrowing rates stable. But officials don’t appear ready to cut interest rates anytime soon. Steve Miller thinks the credit squeeze won’t last long. He’s managing director of Standard & Poor’s Leveraged Commentary and Data. He says investors are turning up their noses at riskier loans, but they’re still happy to buy good debt. He compares loans to real estate.

Steve MILLER: I think what we’ve seen is the loan market equivalent of properties that are in the leafy side of town with the good schools have kept their value much better than the ones that have been built sort of on the marginal side of town. Those have traded off significantly more than the traditional loans that had strong covenant packages and also low degrees of leverage.

Many investors may have pulled out of the market for now. But there are plenty of savvy buyers looking for ways to turn what some see as a crisis . . .

[Sound of cash register.]

. . . into cash.

BACEVICH: It’s a bargain hunter’s paradise.

Debt investor Mike Bacevich says he’s buying up some of those bargains. He says the return to sanity in the credit market means better lending standards and more reward for risk. Lenders are putting those covenants back into loans. And interest rates are rising.

BACEVICH: It’s like a shot in the arm. It hurts when you take the shot, but over the long-term you know it’s good for the health of the credit market.

S&P’s Steve Miller says some $250 billion in bonds and loans is poised to hit the market in the coming months. He thinks investors will buy in, but they won’t pay full price. Private equity firm Cerberus finally closed its deal to buy Chrysler last week. But the investment banks underwriting a portion of the loans lost 5 cents on the dollar. That’s a $300 million discount.

In New York, I’m Amy Scott for Marketplace.

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