Dancing fool?
The FT interviewed the head of Citigroup just a week or so ago, but before the market troubles of the last few days. He was upbeat, saying that “liquidity rushes in” whenever it is needed, and that he was “still dancing”:
Chuck Prince on Monday dismissed fears that the music was about to stop for the cheap credit-fuelled buy-out boom, saying Citigroup was “still dancing”…“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” he said in an interview with the FT in Japan.
His comments come amid growing fears that problems in the US subprime mortgage market, rising interest rates and concerns about loose lending standards could lead to a downturn in the leveraged finance market.
“The depth of the pools of liquidity is so much larger than it used to be that a disruptive event now needs to be much more disruptive than it used to be,” he said. “At some point, the disruptive event will be so significant that instead of liquidity filling in, the liquidity will go the other way. I don’t think we’re at that point.”
Mr Prince said the way big Wall Street banks and hedge funds had picked up troubled subprime mortgage lenders was an example of how “liquidity rushes in” to fill the gap as others spot a buying opportunity.
The man said: “Liquidity rushes in.” Hmmm. Where have we heard a phrase like that before? Meanwhile, the stock market is performing well within normal parameters; the worry appears to be the liquidity Mr. Prince was discussing, according to the WSJ:
The Volatility Index, or VIX, which tracks investors’ expectations about future stock-market bumpiness, has risen to 22, which is considered reasonably high by historical standards. It was as low as 13 in May, or more than 50% below its average during the past 17 years. The VIX measures future volatility of the Standard & Poor’s 500 options that trade on the Chicago Board Options Exchange Inc. Calculated daily by the CBOE, it is widely followed because it captures expectations of how volatility will change, an assessment that includes current levels of volatility.
Since the end of 2003, the VIX hasn’t finished a month above 18 and was as low as 10 this January. Since the fall of 2002, when the current bull market began, the VIX climbed past 20 just eight times…
the current 22 level is well below the 44 level the index reached in September 1998, after Russia defaulted on its debt and credit markets seized up…the current bout of jitters isn’t especially unusual. When the Standard & Poor’s 500 stock index fell 6% from its highs in March 2006 — about the amount the stock market has fallen recently — the VIX nearly hit 21. When the S&P declined about 8% in June of last year, the VIX approached 24. In both instances, volatility soon dropped and stocks rebounded…
More worrisome is the lack of trading liquidity, or the ease at which investors can get in and out of riskier bond positions. Trading has slowed drastically for credit-default swaps, which are insurance policies that profit when bonds drop in price. There is virtually no activating in collateralized debt obligations, or pools of debt, a key market that has helped financing leveraged buyouts. That lack of buying is important because as much as $300 billion in mergers that have been announced haven’t yet been financed, and most of the money for those deals will be borrowed in the credit markets. “That’s what’s scaring the heck out of people, everyone knows the supply of debt is coming, and the deals won’t get done unless the market gets going again”...
$300 billion is rather a lot of LBO’s and mergers that have not yet been financed. One wonders just what kind of dance the banks will be doing in the coming days.