Rethinking Markets

I haven’t said much lately about the financial crisis. Perhaps I’m gun-shy after predicting that my own bank Citi would not survive the year. But mostly it’s because I find the whole topic depressing, both professionally and personally.

Here are some of the things I’m looking at. Let’s start with the finance side, that is, where banks and other lending institutions might be extending credit or risking capital to promote economic growth.

Well….venture capital has been pretty miserable.

Levels of funding for venture capital are about at the levels seen just past the dot-com bust of 2001. So not much is going on there.

And the more traditional banking sector?

Well, the federal funds rate, which is the baseline rate at which banks can borrow from the US government remains at 0 to .25%. That is, banks can borrow money from the federal government pretty much for free. For free!

And how are banks responding? By tightening or leaving unchanged their willingness and standards for lending. That is, banks can borrow money for free and are not willing to lend it out to anyone but their most risk-free clients. What does this mean? It means that banks are collectively still massively worried about the losses and their ability to operate.

And they should be! The top tier of housing markets are now accounting for 30% of all foreclosures – it’s not all poor people with subprime credit loans. In fact, there is a fresh wave of foreclosures and financial losses linked to housing coming up around the corner. A set of loans known as option ARMs, or ‘pick-a-pay’ loans, whereby you pick the amount you will pay per month, deferring the principal payments down the road. The resets on these loans are, frankly, scary as hell:

Many people with these loans are going to see their monthly payments jump significantly right about….now. And since the real estate market as a whole has slumped, the homes are worth much less than the mortgages. How bad will this get? Well, Wells Fargo sees 60-70% loss severity on option ARMs. Pretty scary stuff.

In fact, delinquency rates on not just housing, but all forms of credit are pretty scary. In the most recent quarter: 8.8% of residential real estate loans are 30+ days delinquent; as are 6.7% of loans via credit card.

I’m not including the employment picture (awful); nor am I looking at the long-term fiscal state of, well, the State (awful). And of course, things can change pretty dramatically.

But I would say this:

1. If you are a bank and can figure out how to suss out the people who will pay you back from the people who can not, you should be making a gigantic boat-load of money right now
2. If you are looking to purchase a house, and are sitting on cash, you could buy now, but you don’t have to be in a hurry. There is no sensible reason to believe that things are going anywhere but sideways for the next year at least
3. Banks are on the brink. Still. And any ‘profits’ or ‘bonuses’ that they report are due almost exclusively to the fact that money costs them zero. Or, in some cases, because they are the last players standing in what are now less competitive markets (for, say, Government bond brokerage)
4. Lots of people are hurting, and they are likely going to hurt worse. If this recession has not affected you or someone in your immediate family, it probably will soon.

So, now you know why I’m not saying much about all this.