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Saturday, May 03, 2008

Credit Crisis: In the Eye of the Hurricane

by Calculated Risk on 5/03/2008 03:37:00 PM

From Reuters: JPMorgan says no near end to financial crisis: report

"We can only speculate how deep and how long the recession in the United States will really be and how that in turn will impact banks," [JPMorgan Chase & Co CEO] James Dimon told "Welt am Sonntag".

"But we are not done with the crisis for a long time," Dimon said ...
And from Goldman Sachs: Eye of the Storm (research report no link). Goldman argues there is a "gaping hole in the side of the U.S. economy" from falling house prices (significantly more price declines to come in their view) and too much supply.
[Fiancial market] relaxation is unlikely to mark the start of a sustainable recovery.

... the evidence for spillover effects from housing via the credit crunch, wealth effects, and multiplier effects in the broader economy is mounting, particularly as far as consumption is concerned. ... In an absolute sense, the data this week were clearly quite poor.
And from the WSJ: Downgrades Show Storm Isn't Over
ResCap's credit rating was cut deep into "junk" territory after it unveiled plans to restructure $14 billion of debt and possibly borrow billions more from its parent, GMAC LLC.

Countrywide's debt rating was slashed to junk from investment grade by Standard & Poor's after Bank of America Corp. said it isn't sure it will stand behind roughly $38 billion of Countrywide debt.

Credit markets have become substantially calmer since the Federal Reserve helped avert a complete collapse by Bear Stearns Cos. in March. Friday's downgrades were a reminder that other big financial institutions are still struggling under the weight of problem mortgages.
Being in the eye of the hurricane can lead some people into thinking the storm has passed. Maybe. But probably not.

With falling house prices, less mortgage equity extraction, less consumption, and falling business investment (especially for non-residential structures), there is more storm damage to come.