By Aline van Duyn
July 10 2009
SourceLooking for a souvenir of the credit crisis?
The Museum of American Finance, located on Wall Street, sells a set of five posters from its credit crisis exhibit.
“Depicts key events from February 2007 through early March 2009 and also features an overview of the crisis, important terms and explanations of key moments.” At just $12, it is an affordable gift, too.
The problem with such posters is that they suggest the crisis is over.
But it is not, a fact that is starting to dawn on many investors. Until recently the market tone was being set by talk of “green shoots” and economic recovery. Now, there is more talk of weeds – or even manure when the state of the US economy is described.
That the crisis is not over is also clear from comments by policymakers.
Take, for example, the launch this week of the investment funds that will juice up returns with cheap loans from the US government and buy assets such as troubled mortgage-backed securities that banks may want to sell. The programme – the public-private investment programme (PPIP) – has been scaled back considerably, and a plan to use it to buy loans as well as securities backed by loans – called legacy securities or assets – has been iced. “While utilisation of legacy asset programmes will depend on how actual economic and financial market conditions evolve, the programmes are capable of being quickly expanded if these conditions deteriorate,” the Treasury said. “Thus, while these programmes will initially be modest in size, we are prepared to expand the amount of resources committed.”
So, what could make things worse?
Well, they are the same culprits that caused the problems in the first place: continued falls in house prices and the rapidly accelerating drop in commercial real estate values.
Another crucial element is unemployment. The hundreds of billions of dollars of losses notched up in the banking system due to the property price collapses have come before households start to really feel the effects of job losses.
These continue to accelerate, and it is clear that will mean more defaults on mortgages, credit cards and other loans. Already, the rise in defaults on supposedly safe, so-called “prime” mortgages is causing big concerns.
At a Congressional hearing on Thursday there was scepticism over the International Monetary Fund’s decision to mark up growth forecasts for the world economy this week and its hints that it might reduce estimates for bank losses. Rising commercial real estate losses could easily derail these estimates, it was emphasised.
As problems like these continue, so do the requests for more government backing and money. In the case of commercial real estate, the inability to get new commercial mortgages could make losses even bigger. For example, properties whose owners default cannot be sold on to new investors if they cannot get financing.
Property developers and realtors say they may get some benefits from existing plans – such as the PPIP – but they want more. The wish-list includes a federally backed credit facility and tax cuts.
Remember the uproar about AIG bonuses? How much public backing will there be for spending taxpayer dollars to help real estate developers?
There is already plenty of criticism over plans such as the PPIP, not least because taxpayers take so much of the risk and large investment firms seem to get so much of any gains.
Shifting problem assets from banks to investors may boost banks’ balance sheets, but that will not get money into the hands of people who have mortgages to pay.
The issue is not so much whether schemes such as the PPIP are expanded. The issue is the potentially huge losses down the road. Fights over who takes the hit – individuals, companies, banks, investors, taxpayers – loom.
The days of new emergency programmes, and more acronyms, are not over yet. By the end of the year the museum’s credit crisis gift set is bound to have been expanded.
aline.vanduyn@ft.comCopyright The Financial Times Limited 2009