LSR: U.S. Faces Severe Credit Crunch

The Telegraph Reports: “The United States faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, according to a report by Lombard Street Research.”

“The group said the fast-moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations known as CDOs.”

“‘Excess liquidity in the global system will be slashed,’ it said. ‘Banks’ capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the US hard landing.”

“Charles Dumas, the group's global strategist, said the failed auction of assets seized from one of the Bear Stearns funds by Merrill Lynch had revealed the dark secret of the CDO debt market. The sale had to be called off after buyers took just $200m of the $850m mix.”

“Lombard Street said the Bear Stearns fiasco was the tip of the iceberg. The greatest risk lies in the ‘toxic tranches’ of lower grade securities held by the banks.”

“The worst of the US property crisis has yet to hit since there is an overhang of $2,000bn of mortgages with adjustable rates which have yet to be reset. Many borrowers could see payments jump by half, or even double.”

“At the same time, a spike in 10-year US bond yields by 0.65 percentage points over the last six weeks has drastically repriced the cost of fixed mortgages, knocking away a key prop for the US housing market.” read more >>


About LSR
Lombard Street Research was founded in 1989 by Tim Congdon CBE and quickly established its reputation as a leading provider of independent macroeconomic research. "Our consistent aim has been to provide accurate economic forecasts in order to improve the investment thinking and strategic decisions of financial institutions, banks and corporations worldwide."

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