Credit Crisis

Since November, sovereign wealth funds have injected $41 billion of a total of $105 billion into struggling financial institutions. Since the purchases, the weighted average of those investments is down 40%. Many sovereign wealth funds are somewhat protected by buying mandatory convertible bonds, which pay large dividends to their holders before paying out to those with common stock. Still, sovereign funds were hasty in their investments and have spent the last couple months licking their wounds.

Snapshot asks, when will sovereign wealth funds move back into financials?

Reuters - Gulf Arabs put brakes on buying spree, await bargains
Wall Street Journal - SWF Losses
Bloomberg - Bear Stearns's Ruin Will Shake Sovereign Funds
IMF (Box 1.2) - Global Financial Stability Report

The Libor (London inter bank offered rate), or the interest rate that banks lend to other banks, has been called under question as a reliable indicator of banks' access to credit. Because of the tightening of credit conditions worldwide and hesitance to reveal the sting of the credit crunch, banks may not be reporting the actual rates at which they are able to borrow from other banks. The repercussions for the unreliability of Libor are catastrophic. Interest rates on home loans, auto loans, and student loans worldwide depend on the Libor rate. Citigroup's Scott Peng believes that Libor could be underestimated by as much as .3 percent, causing all banks to lend money cheaper than they should.

Snapshot asks, if Libor is underestimated, how much more pressure will it put on banks?

Wall Street Journal - Bankers Cast Doubt on Key Rate Amid Crisis
Wall Street Journal - Bank Group Expedites Libor Probe
Financial Times - Lenders examine Libor alternatives
Bank of International Settlements - Interbank rate fixings during the recent turmoil

It's all we hear about these days: The U.S. subprime mortgage bubble -- created by poor and at times predatory lending practices and lax banking regulation and creative investment products -- has burst. Of the approximately 7.7 million subprime loans outstanding, over 2 million are at risk of foreclosure and 600,000 borrowers are expected to lose their homes this year. The majority of us are left in shock as we watch the devastation unfold, the bubbles aftermath wreaking havoc on the U.S. (and increasingly global) economy, ensuing fears of recession and economic pain to come, and leaving politicians, economists, and regulators all scrambling to pick up the pieces.
However, in the meantime, the 2006 Nobel Peace Prize winner on Tuesday proudly hailed microfinance -- the innovation of providing small loans to poor, traditionally financial excluded individuals, mainly women -- as "sub sub sub subprime" lending. That means that globally, more than 3300 microfinance institutions provide such "super-subprime" loans to over 100 million clients and growing. Just to be clear: I'm a huge fan of microfinance. However, I'm left perplexed by this dichotomy: How can a lending practice that is almost singlehandedly dragging the whole of the U.S. economy in to a hole simultaneously and sustainably end third world poverty?

It has lately become fashionable for conservative pundits (Larry Kudlow, George Will) and disgruntled ex-bankers (Vernon Hill, for example, in his March 7 American Banker editorial) to blame the current credit crisis on the Community Reinvestment Act. This is patent nonsense. The sub-prime debacle has many causes, including greed, lack of and ineffective regulation, failures of risk assessment and management, and misplaced optimism. But CRA is not to blame.

First, the timing is all wrong. CRA was enacted in 1977, its companion disclosure statute, the Home Mortgage Disclosure Act (HMDA) in 1975. While many of us warned against bad subprime lending before the turn of the millennium, the massive breakdown of underwriting and extension of risky products far down the income scale-without bothering to even check on income-was primarily a post-2003 phenomenon. To blame a statute enacted in 1977 for something that happened 25 years later takes a fair amount of chutzpah.