More pain expected before credit market recovery
NEW YORK – This week’s central bank efforts to unfreeze credit markets will offer only temporary relief and more pain can be expected before a market recovery, analysts said at a credit conference on Wednesday.
The U.S. Federal Reserve announced on Tuesday that it would inject up to $200 billion to strained credit markets as part of a coordinated effort with other central banks, including the Bank of Canada, Bank of England, European Central Bank and the Swiss National Bank.
That effort is likely a short-term solution. Credit markets will likely stay frozen until banks fully realize more losses as they write down their holdings of mortgage-related bonds after years of inflated values for loan and debt securities, panelists said at a credit conference in New York.
Buyers are unwilling to return to credit markets due to a mistrust of credit ratings and a lack of experience among managers of collateralized debt and loan obligations, which is contributing to opaque pricing, according to Janet Tavakoli, president of Tavakoli Structured Finance.
“Most CDO managers aren’t worth what they are being paid,” said Tavakoli, who referenced billionaire investor Warren Buffett’s description of credit derivatives as “weapons of mass destruction” that have wiped out billions of dollars of value.
In addition, too many investors failed to properly analyze assets in collateralized debt structures that are now crumbling, she said during a conference sponsored by the Information Management Network.
Richard Field, founder of financial consulting firm TYI LLC based in Needham, Massachusetts, said greater transparency in pricing is needed before any recovery takes shape.
“Transparency will be the catalyst driving profitable trades,” Field said. “The gold standard for transparency is easily accessible and usable real time, standardized loan details, over the life of the deal.”
While many market observers anticipate that loans may be the first market to recover, James Finkel, chief executive officer of Dynamic Credit Partners, mentioned some trader speculation that the next surprise may come from defaults in the loan market.
None of the speakers on a loan panel said they had immediate concerns about loan defaults.
Steve Odesser, a managing director at Sheridan Capital, however, said it might take years for stability to return to the bond insurer industry, which has been roiled by fears that the sector will be swamped by the collapse of structured debt that it guaranteed.
“My guess is that it will be a couple year process,” Odesser said.