Worse still, credit markets remain under strain. The list of troubled banks has increased from 90 to 117, and is predicted to grow further, putting a strain on the resources of the Federal Deposit Insurance Corporation (FDIC), which guarantees deposits up to $100,000. Banks such as Merrill Lynch, Goldman Sachs, Wachovia and HBOS will have to raise a total of almost $800 billion to cover debt that is coming due this year and next, according to JP Morgan Chase. Institutions such as Lehman Brothers will continue to struggle. And the sovereign wealth funds whose investments in financial institutions have dropped in value will be more cautious. Finally, considerable uncertainty surrounds the future structure of Freddie Mac (a client of mine) and Fannie Mae now that the government is taking them in “conservatorship”. They support some 75% of the mortgage market.
But, as is always the case, there are contradictory signs. The first is that the housing market is beginning to touch bottom. “It appears that existing home sales have stabilised,” report economists at Goldman Sachs. Banks are unloading repossessed properties, sales of new homes are now exceeding housing starts, and house prices are no longer on a hiding to nothing – prices are up recently in more cities than in those in which they continue to drop.
The second bit of cheer is that several of the banks that need to replace debt that is coming due have reported that “debt repayment is business as usual” (HBOS), can be comfortably (Goldman) or “seamlessly” (Wachovia) handled, or met from customer deposits (Merrill Lynch).
Meanwhile, Temasek, the Singapore sovereign wealth fund, has expressed satisfaction with its investments in Merrill and Barclays, and the government has decided that Freddie and Fannie are here to stay in some form or other.