Credit market collapse - the worst is yet to come
Bear Stearns, Lehman Brothers, and Merrill Lynch were here one day and gone the next. Their rapid, almost-overnight disappearance from the world wide financial landscape is as stunning as the collapse of the Twin Towers. Solid as concrete and steel, their permanency wasn't even questioned until days before they were forever gone from the skyline.
The next to go may well include Morgan Stanley and Washington Mutual; if the stock prices of other financial institutions continue to drop, more companies may also be putting up 'for sale' signs.
While the Fed's rescue of AIG may well have prevented a global mess of historic proportions, it also sent a very loud, and very clear message that the financial industry is in danger of worldwide collapse. As one South Korean put it, ""The U.S. government's rescue of AIG helped the markets to avoid the worst case scenario, but the fact that only the government was willing to help indicated the gravity of U.S. credit problems."[emphasis added]
Now we learn that rating agencies, all too aware of their failure to accurately assess credit risk in banks, investment houses, and property and casualty insurance, are re-thinking their approach to assessing the financial viability of health insurers. Fitch Ratings will be dumping the traditional debt to capital formula within a month. "Fitch believes operating EBITDA, funds flow from operations (FFO) and subsidiary dividend capacity are the appropriate measures in assessing financial leverage and debt utilization, to augment the debt-to-capital analysis traditionally used for insurance companies."
Clearly the landscape is changing dramatically - mountains may be disappearing here, but they will likely be replaced by new mountains in other parts of the globe. From here, it looks like New York, long the center of the financial universe, may be losing that status to London, or perhaps eventually Dubai. Investors hate uncertainty, and there's all too much of it here in what has become the Wild West of speculative 'investing'.
Comments
A return to basic economic and accounting principles? Could it be true? If this is the case, then health care insurers may finally get a chance to manage to more than simply quarterly numbers. Too many 'medical' policy decisions were being made in an attempt to keep up profits and manage to Wall St estimates. Having some sort of sane analysis and assessment of these companies may be just the breathing room needed to allow for change in how these companies are managing our premium dollars.
Very unstable times indeed, but at least some appear to be getting back to basics.
Posted by: Susanne Madden | September 18, 2008 10:00 AM
Joe--
I think you're absolutely right--the worst is yet to come.
The South Korean source you quote is entirely right: "the fact that only the government was willing to help indicated the gravity of U.S. credit problems."
Taxpayers are buying assets that no one in the market will touch. this means that we are, no doubt, overpaying for those assets.
And as you suggest, it's not just" banks, investment houses, and property and casualty insurers" that have been overpriced.
For eight years we have had little or no regulation or oversight of markets. We're look at a market-wide financial meltdown.
And it will hit NYC very, very hard.
The only good news for New Yorkers-- younger people (late 20-somethings and 30-somethings) who haven't been able to buy apartments in Brooklyn or Manhattan will be able to do so--if they can put together a downpayment.
I can see NYC real estate values on many properties falling by 30% to 40% over the next year or two.
Posted by: Maggie Mahar | September 18, 2008 8:00 PM