A super-sized 110 billion euro bailout was supposed to calm markets, but investors seemed as frantic as ever. Their logic: Greece still has to go through wrenching cuts, and may end up restructuring its debt, which could force current bondholders to take a haircut. And they fear the euro zone won’t have enough money and willpower to keep the crisis from spreading.
Investors ran for cover in the supposedly safe U.S. Treasuries and dollar, pulling the euro down to a fresh 1-year low. Greek bonds were hammered and the cost of protecting Spain, Portugal and Ireland’s debt went higher. Shares of Banco Santander, seen as a proxy for Spain, fell 7 percent.
Big U.S. banks are getting separation anxiety. They don’t want to spin off their lucrative derivatives desks, even into subsidiaries. The idea, which is part of the financial reform legislation being debated in the U.S. Senate, has merit. It would rid the derivatives market of perceived taxpayer support and discourage risky speculation. But international cooperation will be critical.
Some $30 billion of revenue is at stake, so the concern from Wall Street isn’t surprising. The proposal may not survive Senate horse-trading, and even if it does, it’s not clear whether it would require completely severing the derivatives apron strings, or only a loosening by way of separately capitalized derivatives subsidiaries.
The lackluster reception for Thursday’s slew of U.S. initial public offerings may be a downer for companies contemplating a public listing on U.S. exchanges, but it shouldn’t be discouraging for everyone else. It suggests investors are still being sensibly choosy even though financial markets are awash with easy money.
There has been plenty of talk of bubble trouble. Rock bottom interest rates around the developed world and the return of infectious confidence have raised fears that the rapid recovery in stocks and bonds over the past year is unsustainable. Yet investor exuberance doesn’t look completely irrational just yet.
Greek debt suppliants are playing to thin houses in the United States. The target for a dollar-denominated bond sale by the euro zone’s problem child once stood at $5-10 billion. That now looks like wishful thinking. A Greek official speaking to Dow Jones Newswires said $1-4 billion is more likely. Investors’ wariness reflects the unsentimental reality of Greece’s predicament.
One blow to a bigger bond sale came from Pacific Investment Management, the giant U.S. bond fund firm. PIMCO told Reuters earlier this week that it would sit the bond sale out. With roughly $1 trillion of assets under management, the group’s vote carries serious weight.
A looming wall of debt can be a scary thing. Nearly $830 billion of risky dollar-denominated corporate debt comes due between 2012 and 2014, according to JPMorgan. At first sight that casts a long shadow over credit markets. But borrowers like Cablevision <CVC.N> are already tweaking their obligations. By the time 2012 comes around, the wall will be much smaller.
In fact half the debt in question doesn’t mature until 2014. That means companies and their lenders have some time to pull their bricks out of the wall early — with the help, for the moment, of investors eager to buy new debt.
Lenders do not seem to be good learners. To judge from the credit market, the 2008-9 crisis might never have happened. Perhaps this is the healthy fading of traumatic memories, but the current buying frenzy looks more like a return to an old bad habit.
It’s hard to find debt that investors don’t like. They are snapping up paper from solidly rated companies such as Wal-Mart and Anheuser-Busch InBev, and from still bankrupt Lyondell Chemical. The enthusiasm has reduced the spread on bonds dramatically.
By Agnes Crane and Antony Currie
Investors seem remarkably relaxed about the end of the U.S. Federal Reserve’s $1.25 trillion program to buy mortgage-backed bonds guaranteed by Fannie Mae and Freddie Mac.
Just a few months ago many worried that, without the central bank’s continued intervention, home loans could become expensive enough to scare off prospective buyers and send the market into a renewed slump. Now they’re regarding the Fed’s exit as little more than a minor blip. But that could be a sign that complacency is seeping back into the financial system.
The buyout buzz is back. A growing number of publicly listed companies have become the subject of private equity stalking rumors. Harley-Davidson, RadioShack and Supervalu have all had the treatment recently. But bigger examples are likely to remain scarce for now.
The stunning recovery in credit markets accounts for a big part of the momentum. Leveraged loans have come along for the ride, surging from their troughs of around 70 cents on the dollar to trade above par on the Markit benchmark index.
Home ownership in the United States ranks up there with apple pie and motherhood. The government has championed it for decades, through tax breaks, mortgage guarantees and most recently the Herculean task of keeping Americans in their homes after the housing market collapse. But government subsidies of the American Dream also have a darker side: when things head south, taxpayers end up on the hook.
Government-run mortgage agencies Fannie Mae and Freddie Mac owned more than 131,000 properties between them at the end of 2009, according to recent annual filings. That’s roughly the equivalent of San Francisco’s owner-occupied housing stock — and it’s up substantially from 2008, despite the two giant companies’ efforts last year offloading nearly 200,000 units that they ended up with after their previous owners defaulted.
The bailout of Freddie Mac is certainly paying dividends. U.S. taxpayers extracted a handsome $4.1 billion payout last year in exchange for their $51.7 billion of support since the 2008 rescue of the housing finance giant. And they’re set to receive an even richer dividend from Freddie this year. But these pounds of flesh make little sense right now.
Sure, Freddie managed to get by without any extra public funds in the fourth quarter. A more hospitable market for mortgage-backed securities helped. But Freddie is far from done tapping government coffers. The U.S. Treasury’s equity line initially was supposed to be capped at $100 billion. Yet the government was worried enough about the mounting losses late last year that it decided to give Freddie, and onetime rival Fannie Mae, unlimited access for three years.
The support comes in the form of senior preferred stock with a 10 percent dividend. It’s similar to the terms Warren Buffett struck with Goldman Sachs, but that life-line helped Goldman move on to generate huge profit. Freddie is still losing money — and taxpayers’ money at that. Freddie gushed $25.7 billion of red ink last year.
The dividend isn’t linked to results. If Freddie can navigate the worst housing market in generations without taking another dime from Uncle Sam, it’ll still be on the hook for $5.2 billion in 2010. But that’s an optimistic scenario. The delinquency rate on Freddie’s $2.25 trillion portfolio is still rising, to 3.87 percent in the fourth quarter.
Freddie should pay an onerous price for failure — just not while the government still needs it to help turn the housing market around. In that context, the current arrangement is illogical. Every time Freddie draws on taxpayer funds, it needs to use a portion of them to pay taxpayers their dividend.
The bigger questions on Freddie — privatize, nationalize or run it down — remain unanswered. Those will probably wait until a recovery is considerably further along. It doesn’t mean, however, that the smaller issues don’t deserve attention. The dividend that is only making a bad situation worse is one of them.