Busch: U.S. Not Doing A Great Job In Credit Crisis

The equity market collapse began in the Far East as Sony shares slide 14 pct after theyissued a profit warning. The electronics maker cut its profit forecast in half as the strong Japanese yen and the ongoing credit crisis is hurting demand for its cameras and flat TVs.

This is the second cut in their outlook this year by Sonyand is seen as foreshadowing next weeks earnings reports from Canon, Panasonic, and Samsung. "Sony may close some plants, reduce capital spending and cut jobs to cope with a business environment it warned could remain weak through most of next year. It aims to compile fresh restructuring steps as early as the end of the year," according to Reuters. The Nikkei closed down 9.6%.

As another example of why I get very nervous when governments get involved, I present the Australian guarantee of bank deposits....without guaranteeing money market accounts. Guess what happened?

Russia continues to be a center of attention with the currency and equity market under severe duress as foreigners pull funds from the country and the debt markets start to price a serious risk of sovereign default. As a sign of the extreme: spreads on Russian credit default swaps broke 1,123 and are higher than Iceland's debt before it sought a rescue from the International Monetary Fund. Eastern Europe has gone en masse to the IMF to get emergency loans while some countries dramatically raise interest rates to stave off currency collapse. Romania raised rates 900 basis points and Denmark raised 50. Denmark! Emerging market currencies, bonds, and equities are being sold as investors pull back due to fears of a global recession that has brought on precipitous/sharp/sudden/catastrophic collapse in commodities that sustain developing countries.

The Icelandic Bank collapse continues to send out shockwaves beyond where most thought they would impact. By June of this year, before Iceland's spectacular financial meltdown, German financial institutions had lent $21.3 billion to Icelandic borrowers, according to the Bank for International Settlements according to the WSJ. "That was well over a quarter of all foreign lending in Iceland, and roughly five times as much as Britain, the next-largest creditor country." Who knew that a frozen piece of rock could ignite a financial firm forest fire?

Finally, General Electric Co., (parent owner of CNBC) the biggest U.S. issuer of commercial paper, plans to use the Federal Reserve's new short-term funding facility when it starts next week according to Bloomberg. "GE and its General Electric Capital Corp. finance arm registered as users of the Fed's Commercial Paper Funding Facility, spokesman Russell Wilkerson confirmed today in a telephone interview. The company hasn't set an amount that it plans to borrow and will base that decision on customers' need for liquidity, he said." After the US commercial paper market contracted again last week and is down by 25% since the September, the US Federal Reserve's CP program has created a vacuum since it was announced.

Not only is the credit crisis eliminating demand for CP, but also the announced Federal program has incented money market managers to wait until it begins before buying the paper. The program begins on October 27th. What this means is that no liquidity for ongoing financing needs for companies and vendor financing until the Fed program kicks in. Remember, corporate bond issuance has collapsed as well and that accounts for a larger portion of nonfinancial company liabilities.

  • Today's Market: What the Experts Are Saying
  • Forget About Staying on the Sidelines
  • Cramer Explains Market's Wild Fluctuations
  • Market Psychologist: Cooler Heads Must Prevail
  • 'Sell and Get Out of the Way'
  • Why Emerging Markets Are Caught in Crisis
  • Crescenzi: The Big Questions Now
  • Credit Spreads and Libor Data
  • I would wrap this up by saying the United States continues to be the only entity sufficiently large and coordinated to deal with the multiple issues surrounding the credit crisis...and it's not doing a great job. This means the rest of the world cascades down into the madness of financial anarchy that currently exists. We have massive hedge fund and bank deleveraging at it's most extreme. It clearly is not over. However, this weekend should bring more capital injections by the US Treasury with potential "liquidity" provisions for US auto markers. PNChas just announced it's buying troubled National City Bank. Also, the G20 meeting on November 15th in DC could see the blueprints develop for a new financial architecture to alleviate the stress. Unfortunately, this all takes time and the markets don't wait.



    Andrew Busch

    Andrew B. Busch here