"The trouble with this is not just that it is very difficult to know what a sensible price would be for such loans. "

Also from the FT:

"Taxpayers must plug the big companies’ credit gap

By Richard Lambert

Published: January 15 2009 19:52 | Last updated: January 15 2009 19:52

The credit crunch is now approaching its most dangerous moment for ordinary businesses up and down the UK. Decisions within the next few weeks will have a lasting impact on the shape of British industry in the years ahead.

The problems are at their most acute for those large companies that are rated below investment grade and that for one reason or another – an accident of timing or a sudden worsening of business conditions – need to refinance their debt. It is these businesses that face most difficulties right now.

Of course, life is far from easy for small and medium-sized enterprises. Credit is scarce, not least because overseas lenders are pulling out of the market, and terms and conditions have become more onerous. But the big British banks have increased their loans to this sector over the past year and these smaller companies are not so exposed to the very large funding gap at the heart of the banking problem.

The gap arises because of the freezing up of wholesale financial markets around the world and you can measure it in different ways. Sir James Crosby, in his November report on mortgage finance, suggested it would take about £100bn spread over this year and next just to deal with the shortfall in mortgage finance.

Another way to look at it is to consider that back in 2001, customer lending in the UK was roughly comparable to customer deposits. By the first half of last year, the surplus of lending over deposits was about £700bn. That customer funding gap had been made possible by capital inflows from around the world, which have now more or less dried up. This means that replacing – let alone expanding – existing lines of credit is becoming increasingly difficult for all but those companies that are the very best risks.

The phenomenon is global and its adverse impact is visible everywhere – whether in car sales in Brazil, in consumer goods in Russia or in the pace of economic activity across the eurozone and the US. There are few strong markets in the world for UK businesses to turn to: meanwhile a shortage of working capital is leading to sharp production cuts across a range of sectors.

The large companies most exposed to this problem are also the biggest employers and the main engines of business investment. Thousands of small suppliers are dependent on their well-being. Small wonder that the pace of job losses is increasing and that business surveys are showing a sharp cutback in investment intentions.

One way or another, the taxpayer will have to help plug this funding gap for the time being, leaving the public balance sheet to substitute for the shortfalls in the damaged financial system. The best way to do this would be through a much expanded credit guarantee scheme( YES. AS I KEEP SAYING, THE ONLY WAY TO END A CALLING AND PROACTIVITY RUN IS THROUGH GOVERNMENT GUARANTEES. IT IS SIMPLY A FACT THAT NO OTHER SOURCE HAS THE RESOURCES TO BE BELIEVED. ).

Sir James Crosby suggested the most effective form of intervention would involve the government auctioning its own guarantees in a form that could be attached by lenders to AAA tranches of mortgage-backed securities, issued to fund their new lending. Rather than skewing the system to support just one sector, that approach could be expanded to cover all kinds of viable businesses.

It would also be worth thinking about ways of putting Treasury guarantees around syndicated loans and corporate bonds and allowing them to be bought directly by the Bank of England.

Then there is the question of regulatory capital. The Basel II arrangements mean that banks need to set more capital aside just to maintain their existing lending levels. This makes no sense at this stage in the business cycle, especially at a time when governments everywhere are in effect standing behind their banking systems( IT MAKES SENSE TO THEM ). These requirements should be modified – ideally globally but if necessary unilaterally – so as to allow banks to lend more from their existing capital base.( IT WON'T MATTER. THIS IS A BAD IDEA. )

Other ideas that are floating around include hiving off toxic loans into taxpayer-funded “bad banks”. The trouble with this is not just that it is very difficult to know what a sensible price would be for such loans( I KEEP SAYING THAT THIS IS THE UNSOLVABLE PROBLEM ). It is also that as business conditions deteriorate, more loans are shifting into the toxic category.

These are not easy decisions. But the longer that decisive action is delayed, the more damage will be done in terms of lost output and lost jobs( I AGREE. GUARANTEES SHOULD HAVE BEEN MADE RIGHT AT THE BEGINNING.). In the past few weeks, the government has been addressing the fringes of the problem, and there is a sense that it has been falling behind the curve( IT HAS ). Now is the time to be bold.( ACTUALLY, SEPTEMBER WAS THE TIME, AT THE LATEST. OTHERWISE, THIS IS A GOOD POST. )

The writer is director-general of the CBI employers’ organisation"

"social, cultural, political and economic implications of the growing dependence of the private sector on the state and on taxpayers will be profound"

From Peston on BBC:

"What would you think about lending a few bob to a giant FTSE-100 company?

And when I say "you", I mean all of us, as taxpayers.

Because the next phase in the government's attempt to stem the contraction of credit - that pernicious trend that's driven us into recession - will probably be to put a "sovereign wrap" around bonds and tradable paper issued by big companies.( OVER EVERYTHING )

It's the unfinished business of the Treasury and the Business Department, likely to be unveiled later this month, following the £11bn package of guarantees for bank loans to smaller businesses unveiled yesterday.

Broadly, taxpayers would be guaranteeing loans made to companies by pension funds, mutual funds, insurers and other financial institutions.( THE ONLY WAY TO END A CALLING RUN, FOLLOWED BY A PROACTIVITY RUN, ARE GOVERNMENT GUARANTEES )

And the idea would be to funnel the cash in these funds to the biggest 350 or so British companies.

One reason for doing this is that we're about to see a big bulge in the maturing of loans to companies. As I pointed out in the post "2009 is payback year", for European companies in aggregate there's a trillion dollars of bonds that have to be repaid or rolled over during the coming 12 months.

And although the corporate bond markets have recovered a bit in the past few weeks (the putative "green shoots" which Shrita Vadera now wishes she hadn't pointed out), we as taxpayers are probably going to have to lease our creditworthiness to companies, in order to persuade big investors to back those companies in sufficient size and at the right price.

Which means that the £600bn of loans, guarantees and capital provided to date by British taxpayers directly to our banks would be augmented by substantial guarantees( YES ) from us for borrowing by giant businesses.

In this instance, we'd be following where that recent convert to the alleged benefits of massive state intervention, George Bush's America, has been leading. In the US, there's already colossal support from taxpayers for corporate borrowing from investors in the form of commercial paper - with the US central bank, the Federal Reserve, buying the stuff and acting as de facto market maker.

As I noted in "The New Capitalism", the social, cultural, political and economic implications of the growing dependence of the private sector on the state and on taxpayers will be profound.

If you knew that you were lending to the vendor of your knickers, or the provider of your broadband service, would that change your attitude to them?

As swathes of the private sector receive vital financial support from taxpayers, the balance of power between citizen and big business( AND THE INVESTOR CLASS ) will change. But for better, or for worse?"

For better, if we do this right.

Across The Fear

The Fear and Aversion to Risk is staggering. From Across The Curve:

"Anyway, the cash AAA bonds which I note above are super senior and are packaged for the bondholders’ enjoyment with 30 percent credit enhancement. They are designed to absorb enormous stress. I am not sure how much the landscape would need to mimic 1929 before these things are wounded but they are wounded, but they are designed to withstand a lot of pain.

My belabored point is that at currents levels they are Libor + 1200 which is somewhere north of 14 percent.

One participant citing that yield level noted that sales at these levels can only be motivated by fear and panic.

There are some other factors involved in the panic. I mentioned the failure of the TARP to purchase assets. Anticipation of the TARP led some shorts to keep their powder dry. Those shorts are now happily establishing positions.

Additionally, two loans which comprise a large portion of a deal in the index soured yesterday and that struck fear into the hearts of participants.

And one participant noted the overall dismal state of the economy and noted that it was likely to lead to a glut of office space."

And:

"The corporate bond market had experienced a renaissance or revival of sorts over the last several weeks. The implosion in the CMBS market as well as the persistent weakness in the equity market has drained that sanguine attitude and substituted the melancholic mindset which had prevailed previously.Participants report that there is very little trading. Bid to offer spreads have widened and the little which does trade trades into the bid side."

And:

"By Gabrielle Coppola and Caroline Salas
Nov. 19 (Bloomberg) — Yields on speculative-grade
corporate bonds surpassed 20 percent for the first time in at
least two decades as a declining economy increased the risk of
default.
“Prices are in a virtual freefall,” Fridson said.
“Either the market is right and expecting a default rate
considerably higher than it was in the Great Depression, or we
have such profound dislocations and selling pressures going on
that it really is creating extraordinary fundamental value.”
“The risk premiums are just at a staggering level; the
number is not something any of us expected to see,” he said,
referring to the 20 percent yields. "

And:

"I had not watched the agency market today but it is undergoing an historic meltdown of its own. (I should sponsor a contest in which the winner supplies me with a synonym for meltdown which I am overusing. First prize is a free subscription to Acrossthecurve.com.) The 2 year benchmark widened 22 basis points today to finish at 180. Less than two weeks ago on November 7 it closed at 113. The five year benchmark sector widened 11 basis points today to finish at 155 basis points. The five year benchmark was 109 on November 7th. Ten year benchmarks are 9 basis points wider at 162 basis points. They closed at 115 on November 7,

I use the November 7th date as that was about the low point following an episode of spread tightening following the previous widening. That date is also just prior to the announcement by Secretary Paulson that he was not unrolling the TARP and chose to spend his money by purchasing bank equities rather than illiquid and damaged assets.

It was also just prior to the time in which the Secretary and several of his acolytes engaged in linguistic acrobatics in which they would not ever say that agencies are full faith and credit instruments. Lack of that explicit guarantee has led some large buyers to shun the sector."

Now, from my view as a novelist and philosopher, there's something irrational at work here. The Human Agency type of explanation would recommend combating the irrational fear and aversion to risk. How to do that?

For Corporate Bonds, I would think tax breaks down the line will help, but now? How about Agencies? Fully back them, or not? Into this mix the auto maker's bailout fits, which is why it is such a hard call in this crisis. But not to understand the effects of human agency in this crisis, is to resort to the kind of mechanistic explanation that got us into this mess in the first place, although not by itself, by any means.