Credit Disaster? Maybe It's Not So Bad After All

With only volatile derivative prices or bespoke pricing models to go by, conservative accounting has led to huge writedowns, dents to bank capital ratios and a rationing of lending that we now know as the credit crunch.

So what could be the circuit breaker?

First, bankers and investors need to be able to see some  for the crisis. Otherwise they will continue to hunker down in safe havens of cash and gold and perpetuate the cycle.

One important development this month -- drowned out by panic surrounding the Bear Stearns rescue -- was that credit rating firm Standard & Poor's said the end was in sight for writedowns of the subprime mortgage assets that sparked the crisis.

Putting total writedowns at some $285 billion, it said the banking sector had already written off the majority of its distressed assets and more than $150 billion was already declared. First quarter writedowns at three Wall Street firms that reported last week -- Goldman Sachs , Lehman Brothers and Morgan Stanley -- were indeed much less than analysts had feared.

S&P also emphasized that some subprime mortgage writedowns are larger than any reasonable estimate of actual losses. This raises the prospect that when the mortgage market normalizes, banks may be able to add "writebacks'' onto quarterly results.

In the meantime, central banks need to stand ready to prevent seizures of the banking system and governments need to do all they can to stabilize the housing and mortgage market.

The Fed has gone some distance by slashing lending rates by three percentage points in six months and recently pumping $400 billion of liquidity into the banks.

The U.S. government's release last week of an additional $200 billion of cash from housing finance agencies to plough into the distressed mortgage market is another major boon.

No magic bullets. But when a turn comes, it may happen fast.

"We have all learnt, many times, that every moment of crisis is always also one of opportunity,'' said Max King at Investec Asset Management.

Copyright 2008 Reuters. Click for restrictions.

---

< Prev | 1 | 2