Busch: Recessions Will Deepen

The fallout from the nuclear explosion in the credit markets continues to disperse throughout the world. November is when we see all the data for October and tells us what happened when high yield bond issuance, asset back commercial paper for credit cards, and the IPO market all went to zero. Now, we're getting the earnings and cash burn from companies that were most severely impacted.

GM and Fordannounced that they went through about $7 bio each over the last quarter. GM is pleading with Congress and the US Treasury to receive funds to allow them to restructure and work out mergers. Today, we find out the President-elect Obama did the same with current President Bush. Obama pressed Bush to to take immediate action to help stave off the collapse of the auto industry and to aid the economy. Michigan Democratic Senator Carl Levin is drafting legislation to mandate money from TARP be used to abort Detroit automakers going into bankruptcy. Yesterday, two financial firms downgraded GM with one putting its expected stock price to zero.

Next up, the bad earnings and losses from AIGand Fannie Mae. AIG announced a quarterly loss of $24.5 billion and wrote-down $7.1 billion in credit derivatives. The US Treasury announced a redo of the previous and onerous bailout package to a more reasonable, but larger plan of $150 billion. Not to be outdone, Fannie Mae announced a $29 billion quarterly loss and had $9.2 billion in credit related losses. After announcing the loss, they said they may need more money from TARP, too.

Lastly, we had American Expressannounce that they have won approval from the Federal Reserve to become a bank holding company and feed at the TARP trough as well. October was the first month that credit card companies could not sell asset back bonds backed by customer payments since 1993.

Take a glimpse of the latest headlines:

  • HSBC Posts Write-Downs of $4.9 Billion
  • Deutsche Post to Cut 9,500 Jobs At DHL
  • Circuit City Files For Bankruptcy
  • GM To Cut Another 1,900 Jobs.
  • Nortel Networks Reports $3.4 billion Loss
  • Australia: Biz Confidence at 1991 Lows
  • UK Retail Sales Plummet
  • Fitch Downgrades Four Emerging Markets

Alright enough already, my point is made. The recession is spreading as the credit crisis winds blow the radioactive waste further and further throughout the world. November and December should have the worst economic numbers associated with the six weeks of zero credit between mid-September and the end of October.

However, the crisis is on-going and we're not out of it yet. This means the recessions will deepen. The markets need to have more certainty with the new developing financial market structure and the new US tax structure before banks stabilize and corporations can adjust plans for 2009. The economic reckoning has begun in earnest.



Andrew Busch

Andrew B. Busch here