Thursday, 12 June 2008

What is not expected

There has been some talk recently (perhaps inevitably) about the next crisis to hit. Suggestions include:
  • A wave of U.S. Bank failures. According to Reuters: Future U.S. bank failures linked to the downturn in the real estate market may include "institutions of greater size" than in the recent past, Federal Deposit Insurance Corp Chairman Sheila Bair said on Thursday.
  • Monoline downgrade related issues. Well regarded doomster Meredith Whitney says that Citi, Merrill, UBS Face Monoline Losses.
  • The forthcoming option ARM crisis. Hundreds of thousands of option ARMs will reset in the next year. The new rates will be unaffordable, leading to a wave of foreclosures. As Business Week reports:
According to Credit Suisse (CS), monthly option recasts are expected to accelerate starting in April, 2009, from $5 billion to a peak of about $10 billion in January, 2010. Today, outstanding option ARM loans in the U.S. total about $500 billion, about 60% of which were sold to California homeowners, according to Credit Suisse. Option ARMs were especially popular in the state, where they were heavily marketed during the boom by such companies as Countrywide Financial, Washington Mutual, and Wachovia.
But will these issues really cause further problems? After all, they are well-known. The FDIC has been talking about bank failures since the winter. Few people other than MBIA and Ambac have believed that MBIA and Ambac are AAA for years. And the Credit Suisse chart on volumes of ARM resets is in general circulation. Isn't it surprising bad news that spooks the market rather than merely expected bad news?

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