Fear & Loathing in Credit Land February 2, 2006 One of the most skilled risk professionals we know, reacting to our comment this week in Washington & Wall Street about incredibly low US�bank loan default rates, provides the following color commentary on the state of affairs in the credit markets. He confirms our view that the use of derivatives in consumer lending may be�distorting key data elements�which are part of bank regulatory disclosure. "The liquidity in the system is obscene, as companies issue junk bonds to pay equity holders 'dividends'..." "Regulators are clueless, as money-center banks push debt 'off their balance sheets' in the form of CDOs, and lend hedge funds the money to buy the very same CDO's, only to have the regulators give the banks beneficial treatment (and subsequent reduction of capital) under Basel Accord rules..."� "The consumer is mortgaged to the hilt... We don't need to touch on the housing market...." "Emerging market debt spreads are so low that Mexico is priced as a less risky credit than quality US corporates..." "The ratings agencies are in cahoots with the finance boys," says the banker.� We find his view confirmed by the painfully slow movement of the ratings monopolies in downgrading sectors such as autos, banks�and real estate. And the fact of which we are constantly reminded: "The current
wiz-kids have never been through a real bear market... I tell you, this is the
first time as a risk manager that I am a bit frightened."�
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