Oct. 10 (Bloomberg) -- Nouriel Roubini, the New York University professor who two years ago predicted the financial crisis, talks with Bloomberg's Betty Liu about the outlook for the global financial market and the economy. Roubini said world financial officials should orchestrate interest-rate cuts of at least 1.5 percentage points to help avert a depression. (Source: Bloomberg)

00:00 Need for "partial nationalization" of banks
01:07 Risk of "severe global depression"

Running time 02:57 - Here's the link!

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ay3zxyyxAUgM   and click where it says: "related video graphics"

LONDON, Oct 17 - Investors who bought protection against a Lehman Brothers default in the credit default swaps market have little to worry about getting paid on Tuesday, when an estimated $8 billion in cash payments on Lehman CDS come due.

While these payments may push a few fragile hedge funds over the edge, analysts say, stringent collateral requirements mean most protection buyers will not be out of pocket.

Comment has circulated in the markets and in the media that CDS counterparties may not be able to come up with the cash.

"The big issue is whether they (CDS) will be settled successfully," wrote ING rate strategist Padraic Garvey on Friday. "The talk is that hedge funds sold protection on Lehman ... well now they will have to cough up."

Analysts at Citigroup and Barclays Capital said market fears about the Oct. 21 date have been overstated.

"This is more of a slow process, and people will have had to come up with the money long before the settlement date," said Michael Hampden-Turner, a Citigroup credit strategist.

The standard practice in the CDS market is that hedge funds and other counterparties must adjust collateral on a daily basis as the value of a contract changes.

As Lehman CDS fell in value, before and after it filed for bankruptcy, protection sellers would have had to provide increasing amounts of Treasury bonds or other cash-like investments as collateral for those contracts.

"The mark-to-market on the CDS is margined daily as a credit event draws near, and that mitigates a large, lumpy payment at the end," said Peter Goves, another Citigroup strategist.

In the Lehman case, the largest collateral payments would have been required in the four or five days following the bankruptcy filing in mid-September, when spreads on senior debt widened from around 700 basis points on the five-year contract to around 7,000 basis points, based on the then market view of an estimated 30 percent recovery, Hampden-Turner said.

NO NASTY SURPRISE

The cash settlement CDS auction on Oct. 10 set final recovery on the CDS at an even lower 8.625 percent.

But by that time, market expectations had already fallen to close to that level, around 10 cents on the dollar.

"The auction was not a huge surprise, worse than expected but only slightly," said Puneet Sharma, a credit strategist at Barclays Capital. "If you are a solvent institution or a counterparty to a solvent institution, then you would already have collateral close to that amount."

For a few hedge funds or other leveraged investors who sold protection on Lehman , however, Tuesday could prove to be a strain.

Funds typically use leverage to obtain the collateral they provide on CDS contracts.  

So while the CDS counterparty is already holding collateral to cover his payment, other lenders to the hedge fund may end up the losers.

If the only event in the market were the Lehman failure and the resulting payment of $8 billion on its CDS, that alone would probably not be enough to cause any funds to collapse, Barcap's Sharma said.

But in the current environment, "the stresses that hedge funds are facing because of volatility are unprecedented," he said. "The number of margin calls from the commodity, equity, credit, volatility and other positions are going to be enormous."

For some investors, Tuesday's payment "could be the final straw", he said. 

Oct 21 Fitch: The financial crisis will halve real growth in credit this year as financial firms reduce leverage, investors' appetite for risk declines and the worldwide economy slows. In particular, real global credit growth, which peaked at almost 16 percent in 2007, will slow to 7 percent by year-end and shrink to nearer 5 percent next year. ``The slowdown will continue to be most pronounced in emerging Europe but will spread to all regions."
• Oct 13: George Magnus: Even if a financial meltdown is averted, we should be under no illusion that the deleveraging in the financial and household sectors will stop. As a result, four big battlegrounds remain. First, there is a high possibility of further bouts of financial stress and failures. Money markets are still broken and recovery will take time. Second, illiquidity, a preference for cash-type instruments, even over government bonds, and a considerably ex­panded supply of government bonds raise the threat of an untimely increase in bond yields. Third, the global recession that has started may yet turn out to be sharper than expected – and certainly longer. This will bring sustained, and some new, credit risks. Fourth, much slower growth and the risk of some home-made financial crises in emerging markets warrant close scrutiny.
• Roubini before coordinated G7 action: Urgent and immediate necessary actions that need to be done globally include:
  1) another rapid round of policy rate cuts of the order of at least 150 basis points on average globally;
  2) a temporary blanket guarantee of all deposits while a triage between insolvent financial institutions that need to be shut down and distressed but solvent institutions that need to be partially nationalized with injections of public capital is made;
  3) a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;
  4) massive and unlimited provision of liquidity to solvent financial institutions;
  5) public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;
  6) a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government;
  7) a rapid resolution of the banking problems via triage, public recapitalization of financial institutions and reduction of the debt burden of distressed households and borrowers;
  8) an agreement between lender and creditor countries running current account surpluses and borrowing and debtor countries running current account deficits to maintain an orderly financing of deficits and a recycling of the surpluses of creditors to avoid a disorderly adjustment of such imbalances.
• Total U.S. credit market debt as % of GDP started to shoot up in the early 1980s and reached 350% of GDP in 2008. The only other spike in the series is in the 1930s during the Great Depression--> this series tends to be mean-reverting, meaning that deleveraging from current record levels could be protracted and painful. (nc)
• Bill Gross: What Happens During Deleveraging? 1) All risk spreads go up; 2) Delevering slows/stops when assets have been liquidated and/or sufficient capital has been raised to produce an equilibrium; 3) Raising sufficient capital depends on new sources of liquidity (or balance sheets) coming in; absent that, prices of almost all assets will go down--> only new source of liquidity available on the scale needed for a bull market anywhere is the Treasury. (Bill Gross at PIMCO)
• Frank Veneroso (via NC): The bursting of the commodities bubble will be the last one after Japan, Asia, technology, housing--> serious deleveraging process around the corner.  
• McCulley (PIMCO): if all financial institutions deleverage at the same time the result is macroeconomic asset deflation--> only medicine is governement sponsored countercyclical intervention with both fiscal and monetary measures--> ensuing fiscal deficit is lesser evil!
• Satyajit Das: ABS CP conduits, SIVs and CDOs are being gradually dismantled and the assets returning onto bank balance sheets. Hedge funds have been forced to reduce leverage by between a third and a half times. Prime brokers and banks have significantly tightened credit, increasing the level of collateral needed even against high quality assets. Each 1 times leverage reduction in hedge fund leverage represents in excess of US$2 trillion of assets. This accelerates the de-leveraging process.

• Oct 22: In an extraordinary meeting, Hungary's central bank (NBH) raised the benchmark interest rate by 300bp to 11.5% in an effort to prop up the local currency
• The first emergency increase in five years came after policy makers left rates unchanged (at 8.5%) at their scheduled meeting on Oct 20
• Bebesy of Budapest Investment Management (via Bloomberg): This is a desperate decision; 'the size is fine, but what we got here is the evaporation of global liquidity, so it's uncertain if the rate increase will rev up demand for the forint' 
• Danske: Shortly after the hike and the initial strengthening of the forint, the currency started to weaken once again - a clear indication that markets do not expect the hike to have a lasting impact on the forint
• Portfolio.hu: The focus of the rate hike was primarily to address the speculative side of the current financial turmoil, as it cannot really do anything about liquidity on the government securities market
• There is concern that the turmoil in Hungary could spread to other CEE countries, potentially forcing other central banks into raising rates to safeguard currencies (FT) 
• Hungary's decision appears to have been motivated by concerns over the impact a weak local currency would have on the country’s huge existing stock of foreign currency debt
• NBH's focus is likely to shift from inflation concerns to protection of financial stability, as the Hungarian banking sector faces difficulties in accessing external funds and FX swap market - Gárgyán of Citibank (via Portfolio.hu)
• Hungarian inflation has exceeded NBH's 3% target since Aug-06
• Cenbank scrapped the HUF's trading band against the euro in late Feb to help fight inflation in the hopes that the move would result in currency strengthening

Argentina's government took over the management of $28.7 billion in private pension funds that sharply declined in value this year due to global turmoil. The government intends to increase the pool of money it can borrow from to meet debt obligations next year. As of now, retirement and pension fund administrators, known as AFJP, manage private pension accounts for 9.5 million depositors, of which some 40 percent are active contributors. Essentially, most mandatory funds that flow into the private pension system would now become part of the government's pay-as-you-go public pension scheme. The global financial meltdown has put Argentina's private pension assets in jeopardy. Besides that, the government would have access to some USD 1.2bn per year in new flows currently deposited in the system, a move would certainly help the government financially. The idea of using social security funds to avoid a default (or to pay the debt) next year should cause a sharp drop in confidence in the country and in this government

• Argentine bond yields soared above 23 percent and stocks sank the most in a decade as the government sought to take over pension funds, a move analysts said is a bid to seize assets and stave off the second default this decade. President Cristina Fernandez de Kirchner proposed legislation today to nationalize pension funds, which would give the government control of $29 billion in retirement accounts. Argentina has struggled to cover financing needs that have swelled as the global financial crisis pushed down prices on the country's commodity exports. Borrowing needs will climb to as much as $14 billion next year from $7 billion in 2007
• Argentine stock, bond and currency markets are expected to be hit hard if the government moves to takeover the private pension funds. President Cristina Kirchner is set to announce the complete nationalization of Argentina's private pension funds when she reveals reforms to the country's retirement system. In addition to decreased volume, the move is likely to add more downside pressure to capital markets, which are already reeling due to the international financial crisis. The pension fund takover is also likely to put pressure on the peso, and the Argentine Central Bank intervened heavily in early foreign exchange trading
• The collapse in commodity prices and the slowdown in global activity look to be placing the Kirchner administration in front of the nasty realization that their funding for next year is highly compromised. The government could look to nationalize the private pension funds. In 2001, Cavallo stuffed the pension funds with public paper to finance the deficit but at least he did not go as far as nationalizing them. Essentially, most mandatory funds flows into the private pension system would now become part of the government's pay-as-you-go public pension scheme. The reasons the government is likely to give is that the global financial meltdown has put Argentine's private pension assets in jeopardy. The truth is more likely that the government would have access to some USD 1.2bn per year in new flows currently deposited in the system, on top of the fact that some of 35% of AFJPs's USD30bn in  assets are not currently in government securities. This move would certainly help the government financially, but its sets the clock back almost 15 years in terms of economic structural progress in Argentina. Under a PAYG scheme, retirees count on the tax payments made by future generations to receive their money. Given that the economic clouds are darkening in Argentina, their money is much less likely to grow or be returned under a scheme managed by the government (where the liberated funds are unlikely to be ring-fenced) than by a more diversified private scheme .

As banks default, many involving credit derivatives written on the defaulted company need to be unwound. E.g. a synthetic CDO repackages not a portfolio of bonds but a portfolio of CDS without owning the underlying bonds. Other structured products include that incorporate a large amount of credit protection selling as a means for leverage. Unwinding these structures requires to enter offsetting trades by buying credit protection. As an unintended consequence, buying protection in a systematic way is equivalent to betting against a company's credit worthiness (like shorting the stock in equity markets)--> this sends investment grade companies' CDS and borrowing costs higher. Regulators are looking at  over the counter market. (WSJ)
• Fitch (via RiskCenter) October 21: The 'AAA' ratings of Derivative Product Companies (DPCs) are premised on the bankruptcy remoteness of their structures and are not linked to the ratings of their sponsors. Fitch is evaluating this premise following the voluntary filing for Chapter 11 reorganization by two DPCs in the Lehman Brothers corporate structure.  
• S&P: (via Bloomberg): The collapse of Lehman, WaMu and the Icelandic banks, as well as the U.S. government's seizure of the mortgage agencies, will have a ``substantial'' impact on corporate CDO ratings.
• Oct 22 Baring analyst: ``The same kind of shudders that went through the asset- backed CDO market will probably go through the corporate CDO market. We'll see a pickup in default rates."
• WSJ Oct 20: Perhaps the weakest link in the market are specialized funds, known as "constant-proportion debt obligations" () which typically borrowed about $15 for every dollar their investors put in. They also contain safety triggers that force them to get out of their investments if their losses reach a certain level. Analysts estimate that most CPDOs reach those triggers when the cost of default insurance hits about the level where it is now.
• SIFMA Q2 update: Global issuance of CDOs from 2004 - 4Q2007 totaled $1.47 trillion. Only $17.3bn worth of CDOs issued in q2 2008 compared to $175.9bn in Q2 2007.  
• SIFMA: CDO issuance by underlying collateral in 2007:
  -$254.8bn structured finance CDOs (collateral pool consisting of RMBS, CMBS, CMOs, ABS, CDOs, CDS, and other securitized/structured products)
  -$148.3bn high-yield loans (rated below BBB-/Baaa3) CDOs
  -$78bn investment-grade bonds CDOs
• CDOs by issuance type in 2007:
  -$86.8bn Market Value CDOs (triggers unwinding if net asset value falls below theshold);
  -$51.5bn Synthetic funded CDOs (synthetic CDOs sell credit protection via credit default swaps (CDS) rather than purchase cash assets. 'Funding' requires from investors in CDO tranche a cash deposit as collateral);
  -$347.4bn Cash flow and Hybrid CDOs (cash-flow CDOs pay off liabilities with the interest and principal payments of their collateral. Hybrid CDOs combine the funding structures of cash andsynthetic CDOs.)
• Geithner, NY Fed: The sheer number of financial contracts that would have to be unraveled in the context of a default, the challenge that a former colleague of mine likes to refer to as "unscrambling the eggs," could exacerbate and prolong uncertainty, and complicate the process of resolution. 

• The cost of insuring Russian  against bankruptcy (spreads of Credit default swaps on Russia's debt ) rocketed to 1,123 bps, higher than Iceland's debt before it sought a rescue from the International Monetary Fund (Telegraph) Although other emerging markets including Baltic countries, Turkey and CEE countries have higher external financing needs and run current account deficits, the reduction in Russia's reserves, the prospect of and  deficits, the implicit and explicit state assumption of significant  as the oil price slumps point to further risk. 
• Russian sovereign bonds were already trading at higher risk than other EM sovereign bonds even before S&P lowered its credit ratings outlook to negative from stable citing the worsening outlook for public finance in light of lower oil prices and increasing government support of the banking sector
• Russia still looks stronger than some of its peers despite vulnerabilities (Uralsib) -  strengthening capital outflows as deposits are converted into dollars which may prompt restrictions on fx  transactions. Several other commodity export-led economies could face similar worries, yet they have not been downgraded  - the difference may be due to perception of higher political risk and government-led consolidation in Russia
• The Russian banks’ dependence on wholesale and external funding is key to the economy’s vulnerability, which can be expected to mount if commodity prices fall further (Citi) Although the CBR's reserves far exceed Russia's short-term debt, they barely cover Russia's total external debt. Intervention to stabilize the rouble is depleting reserves rapidly (though the dollar rally also reduces the value of EUR and GBP holdings). Russia has to roll over $40b in debt this quarter and $150b in the next year. and the Government has promised over $200 billion in short and long-term capital to ease liquidity crunch and substitute for external finance
• Russia may run a current account deficit with oil in the $60-70 a barrel range given the ramp up in imports and reduction in oil inflows - capital flows have already reversed and Russian investors flight to USD has pressured the rouble.
• Weafer: An oil price in the $60’s/bbl should still mean a defendable ruble, but there will be a lot more pressure at $60/bbl, or lower. A combination of falling oil and a weakening currency will increase downward pressure on equity and bond markets. The correlation between the price of oil and the RTS was not very tight as oil was rising but it has increased on the downward trajectory.
• Lacking a developed domestic bond market, the only way for oligarchs to raise money at present is by selling their equity, contributing to massive equity selloffs. Russia's unique fragility is that over $1 trillion of debt needs to financed from a domestic capital pool of $600bn (Bond)
• Now that Russia's own sovereign debt is in question, and many other emerging markets are turning to the IMF to stabilize their balance of payments, markets no longer believe Russia is strong enough to guarantee the estimated $530bn of foreign debts accumulated by its companies during the break-neck expansion of the oil boom. (Redeker, via telegraph)

• Several Emerging economies and one advanced one are in talks with the IMF or regional institutions to provide capital in the face of global liquidity shortage. These countries tend to have high external financing needs (large current account deficits/GDP, etc); judging from the development in credit default swaps (CDS), other countries might soon have to ask for assistance (Danske), particularly those with large current account deficits
• Risk of contagion, especially in  and Eurasia is high.  With most countries not able to finance their own bailouts, some may turn to regional financing eg to the ECB, to the ADB or Central American countries to the ,rather than the IMF
•  IMF rules allow it to lend up to 5x a country’s quota (amount deposited when a member state joins), but rules can be relaxed in a crisis
• Citi: The rise in default risk premia across CEEMEA may reflect the the greater likelihood of capital controls. Ukraine is most at risk of such a move
• Merrill: EEMEA banking systems remain structurally underdeveloped and not levered. Yet higher credit growth relative to deposits suggests that, despite comfortable loan-to-deposit ratios, EEMEA banks have been reliant on loans from foreign "parent-banks", which underscores the short-term risk of loans growth slowdown. Several foreign-owned banks in the region reportedly freezing credit lines even for CEE "blue chips" in recent weeks
• FT: Countries in the Baltics and Balkans – including countries like and  - have much larger funding gaps as a share of GDP than Hungary 
•  may receive $14b from the IMF in a move that could provide much-needed credibility. Ukraine's CDS spreads have risen to 1900bps points, more than 4x June levels. Ukraine's current account deficit might be as large as $15 billion. ->Citi: Aside from announcing extraordinary measures aimed at preventing a flight to foreign exchange, Ukrainian policy response requires additional credibility, and this should come in the form of an IMF program that reinforces needed policiesc regi
• is poised to receive $6bn in funding through a rescue package led by the IMF, along with central banks in the Nordic region and Japan (FT); Iceland's talks with Russia over a EUR4 billion ($5.5 bn) loan appear to have broken down after official returned home empty-handed; a rescue package is seen as necessary after Iceland nationalized its three biggest banks to prevent a banking system collapse and now faces the threat of national bankruptcy
• On Oct 13 the IMF pledged to help as needed after bonds, equity and the forint plunged the previous week. The central bank will pump unlimited funds to the interbank market through daily currency-swap tenders and scrap a limit on pension fund bond holdings to support the bond market. Hungary has received emergency funds from the ECB though despite early indications that CEE countries might be left out in the cold as Western European countries supported their own financial systems
• : Government asked IMF for a new deal, saying it would not necessarily seek funding from the lender, but an agreement to reassure investors that Serbia was safe.
• : Has requested credit from the IMF to uphold stability and economic growth rates amid global crises. The CB confirmed the request a day after Russia agreed to issue a $2b loan to Belarus while resuming negotiations on a proposed common currency between the two ex-Soviet neighbors. Foreign reserves fell in September to $4.9b, covering about 40% of external debt, from $5.6b
• Other countries that may face short-term funding issues but might not apply to international institutions include  and 
• Citi: We argue that in the absence of a strong policy response in  — supported by a new IMF arrangement — the current sentiment is unlikely to improve and the lira is likely to weaken further
• Govt is seeking $10-15 bn loan for 2008-10 from IMF, ADB, World Bank and other bilateral donors like Saudi Arabia, China, U.S. to finance external debt payments of $3-4 bn during next 2 years; recently received $1.4bn from World Bank to fund its fiscal deficit

In spite of easing gas prices, tightening credit conditions and lending standards, worsening job losses, declining incomes and returns from stock market along with continued fall in home prices and high debt is affecting household wealth and consumer confidence. Consumer spending will contract in H2-08 exacerbated by credit crisis (esp. for mortgages and auto loans)
• The Conference Board Consumer Confidence Index fell to 38 in Oct (lowest reading since records began in 1967) from 61.4. This is the biggest decline since 1970s and is also below readings in past 4 recessions. Present Situation Index decreased to 41.9 and future expectations index fell to 35.5 (also lowest on record, biggest drop since 1970s)
  
• Cont: Labor market differential (share of people saying jobs are plentiful - share saying jobs are hard to get) continued to fall to -28.3%; share of people expecting more jobs in 6 months less fewer jobs declined to -34.1% (lowest since 1980); percent of people expecting income/job opportunities to rise in next 6 months declined; percent of people planning to buy automobile fell to record low
• Paribas: Extremely low consumer confidence indicates unemployment rate will rise sharply and retail sales will decline significantly so that consumer spending will continue to decline in the coming months
• The Reuters/University of Michigan preliminary index of consumer sentiment fell to 57.5 in Oct from 70.3 in Sep (biggest decline on record) as index for current conditions fell to record low, and index for expectations of future conditions fell to a 4-month low; decline in sentiment was led by high-income groups, older workers and in North-East region (impact of bearish stock market, financial crisis); spending plans esp. to buy home fell sharply though measure of inflation expectation improved
• The Reuters/University of Michigan final index of consumer sentiment declined to 70.3 from the preliminary reading of 73.1 but rose from the Aug reading of 63; index for current conditions and expectations of future conditions declined while expectations of future prices eased
• Consumers will mostly spend on discount and basic goods while cutting back on homes, auto or other high value spending; retail sales have been declining since July after getting temporary boost from rebates in Q2 
• Consumer credit contracted -3.75% (most on record) in August; household net worth declined $438bn to $56tr in Q2-08
• Personal disposable income and real personal spending have turned been negative since June
• The ABC News/Washington Post Consumer Comfort Index was at -47 in the week ending Oct 14 (more than 30% below-avg; 4 points away from record lows of -51); the index fell to -43 in Q2 (lowest since Q1 1992)
• Merrill Lynch (not online): Usually during recessions, consumer confidence gets a temporary boost from fiscal/monetary stimulus before trending down again as the job market hits a bottom; consumer spending will hit the mid-70s type downturn contracting during Q4-08/Q1-09
• Goldman Sachs (not online): In spite of easing (but still relatively high) gas prices, consumer confidence will remain at a low leading to contraction in consumer spending b/w 3Q08 to 1Q09, flat in 2Q09 and recovering in 2H09

WASHINGTON (Nov 7th 2008)-- A majority of financial firms say a lack of clarity about important aspects of the Treasury Department's rescue plan is diminishing their willingness to participate, according to a survey conducted by the Securities Industry and Financial Markets Association, the industry's top lobby group.

Treasury originally said it would start purchasing troubled assets within weeks of Congress's passage of the $700 billion financial-rescue package in early October. Now, however, the department's efforts are focused on a separate program to invest $250 billion of new capital into the banking and financial sectors.

Tim Ryan, president and CEO of Sifma, said Treasury needs to turn its attention back to creating a mechanism for the purchase and pricing of these assets. The idea behind the original plan was that removing bad assets -- such as mortgage-backed securities -- from banks' books would spur financial firms to resume lending.

"Our hope is that between now and the inauguration, this does not go into cold storage, because the system can't afford that," Mr. Ryan said. "We need them to stay focused and make some decisions."

The Treasury Department declined to comment.

A survey of more than 400 firms by Sifma and other financial-industry trade groups found that a large percentage of financial firms would be reluctant to participate without more details about any potential program. More than nine in 10 said they were less likely to participate in the so-called Troubled Asset Relief Program because of a "lack of clarity." Nearly the same number expressed reluctance if Treasury requires firms to issue warrants in return for taking assets from them.

Treasury is still formulating its plans to purchase assets and has yet to settle on a comprehensive approach, say people familiar with the matter. It hasn't yet hired asset managers. Treasury officials still need to determine how to price securities whose underlying markets are "pretty thin and not at all healthy," said Wayne Abernathy, executive vice president for regulatory affairs at the American Bankers Association.

The asset-purchase program was originally expected to operate as a reverse auction, with financial firms with toxic securities telling Treasury the lowest price they would accept to sell the assets to the U.S. government. But Treasury is considering other ways for the program to operate. Variations could include direct purchases of securities by Treasury or a system by which Treasury or its asset managers match the price paid for asset purchases made by private-market participants. Industry participants favor Treasury's directly negotiating and purchasing assets, according to the survey.

The issue is complicated by the wide array of now-illiquid assets that are held by financial firms, said Douglas Elmendorf, a senior fellow at the Brookings Institution think tank. Another practical concern is the limits on Treasury's purchasing power. Roughly $300 billion of the initial $350 billion chunk authorized by Congress is likely already tied up in the capital injections for banks and a foreclosure-mitigation program.

Even if Treasury spends the remaining $400 billion on purchasing illiquid assets, it would represent only a small percentage of the trillions of dollars of outstanding mortgage-backed and other asset-backed securities.

• Nov 20 WSJ: Analysts at Credit Suisse said two big commercial mortgages that had been packaged into securities in the past year were likely to default. The rapid deterioration of these loans fed worries that the weakening economy and higher unemployment rate would drag down the $800 billion market for commercial-mortgage-backed securities, or CMBS, which so far has withstood the credit crisis with low delinquency rates.
• FT Alphaville: Commercial-mortgage-backed securities are different fish to residential-backed bonds: the pools are far less granular. Which goes some way to explaining those apparently low delinquency rates. With CMBS, when trouble does hit, it is much more sudden and sharp. The delinquency rate might not be expected to smoothly move higher, it should jump. And it will do so when the real pain begins to bite in the economy-->Markit AAA CMBX spread went from 260bp to 550 within past 2 weeks
• Banks' exposure to real estate:
  - At the end of Q2, Deutsche Bank held $25.1 billion worth of commercial loans. Morgan Stanley held $22.1 billion and Citigroup had $19.1 billion. Lehman holds largest exposure with $40bn worth of commercial real estate assets--> A large part of its portfolio is a high-risk loan known as bridge equity made with Archstone, a metropolitan apartment developer, and most of the rest are floating-rate loans, which are riskier, according to a person who reviewed the offering.
  - CRE and CMBS exposures will likely exacerbate credit problems at U.S. banks but not as much as RMBS (except those banks specializing in commercial real estate);- default rates on CMBS collateral could increase toward the historical average of 80bp, roughly double or triple the lowest point of the credit cycle;- lax underwriting standards could increase rates on bank CRE loans further;- recent valuation declines in the CMBS market imply near-catastrophic and rather unrealistic credit conditions;
  - CMBS troubles should not reach the 1980s levels.  (Fitch and Interest Rate Roundup)
• Reuters: Commercial property prices headed for a great fall: Moody's as well as OTC traders expect 20% decline over next two years. MIT non-residential property index fell in y/y terms n past 2 quarters.
• Fitch August 1: 50% of CMBS outstanding are 2006/2007 vintages--> Borrowers would default on an average of 17.2% of securitized commercial mortgages over 10 years if U.S. economy dips into recession with 0.2% contraction in growth, compared with current very low default rates of 4% (i.e. +330%).
• One third of regional banks have commercial real estate exposure of at least 300% of equity. So far, non-current loans have increased in the construction&development category to around 5%; non-residential buildings, multifamily buildings, and real estate loans not secured by property are set to follow suit.
• Fed July Senior Loan Officer Survey: Record high share of banks, ie over 80%, reporting that they tightened lending standards wrt commercial real estate loans
• Bloomberg June 26: Commercial-mortgage backed securities (CMBS) offerings dropped to $12.2 billion in the first half of the year, from about $137 billion in the same period of 2007--> Analysts: "The market for CMBS has no real prospect of coming back."
• Fitch: Since '05 interest-only loans and loans with high loan-to-value ratios implying unrealistic future rent expectations

Nov 23: Federal government agreed to rescue Citigroup by helping to absorb potentially hundreds of billions of dollars in losses on toxic assets on its balance sheet and injecting fresh capital into the troubled financial giant

• Details: Citigroup and the government have identified about $306 billion in troubled assets. Citigroup will absorb first $29 bn in losses. After that, remaining losses will be split between Citigroup and the govt, with the bank absorbing 10% and the govt absorbing 90%. Treasury Department will use its bailout fund to assume up to $5 bn of losses. If necessary, FDIC will bear the next $10 bn of losses. Beyond that, the Federal Reserve will guarantee any additional losses (NYT)
• Essentially, taxpayers will be on hook if Citigroup's massive portfolios of mortgage, credit cards, commercial real-estate and big corporate loans continue to sour. In exchange, the govt will get $27 billion of preferred shares paying an 8% dividend. In addition, the Treasury Department will inject $20 bn of fresh capital into Citigroup. That comes on top of the $25 bn infusion Citigroup recently received under TARP
• There will be no management changes; there will be some compensation limitations, but those have not yet been made clear 
• Criticism: Plan is arbitrary and cannot possibly set an expectation for future deals. In particular, by saying that the government will back some of Citi’s assets but not others, it doesn’t even establish a principle that can be followed in future bailouts (James Kwak via Economist's View)
• This is not a particularly good deal for American taxpayers (Robert Reich via Economist's View). Exercise price for government warrants is $10.61, while Citi closed at $3.77 on Nov 21 (James Kwak via Economist's View)
• Citigroup by the numbers: (WSJ Nov 24) 
Total Assets: $2.05 trillion
Off-balance sheet assets: $1.23 trillion (of which $667 billion in mortgage-related securities);
Market Cap: $20.5 billion
Q3 2008 Revenue: $16.68 billion
Dividend Yield: 10%
Share Price: $3.76 

• Dangers of a Citigroup Failure: The failure of a single major financial institution could result in losses to the OTC derivatives market of $300-$400 billion, a new working paper finds. What’s more, since such a failure would likely cause cascading failures of other institutions, the total global financial system losses could exceed $1,500 billion (Singh/Segoviano -IMF)
Background
• WSJ: As share price fell, Citigroup’s credit-default swaps, a measure of insurance against debt default, rose to reflect a cost of $470,000 to insure $10 million in bonds against default for five years
• Nov 19:  Citi agreed to acquire a further $17.4 billion of assets held by structured investment vehicles advised by the company. Citi was forced to bail out seven troubled SIVs in December, assuming $58 billion of debt out of a total $87bn, as a slump in credit markets eroded the value of their assets
•  Fitch, Nov 6: Citigroup has indicated that Citi-branded net credit card chargeoffs could exceed their 1992 peak of 6.44% in coming quarters, particularly if the unemployment rate remains under pressure

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