CREDIT CRISIS: Scholes vs. Paulson

Myron Scholes, chairman of Platinum Grove Asset Management LP and
1997 winner of the Nobel Prize in economics, said the worst of the
crisis in credit markets may not be over.

"From my perspective, I think that we don’t know if the storm has
passed or if we are still in the eye of the storm. Are there other shoes to
drop and new events or new shocks that will come to the fore?’ In my view, this is probably as bad or worse than the 1989-1990 crisis
and may even rival the worst crisis we’ve seen since the end of the
Second World War,” Scholes said.

click for audio


U.S. Treasury Secretary Henry Paulson said financial market conditions have improved to the point that they will be influenced more by economic forces such as housing than by the credit crisis.

"I expect that financial markets will be driven less by the recent turmoil and more by broader economic conditions, and specifically, by the recovery of the housing sector,” Paulson said in a speech in Washington. He reiterated his view that “we are closer to the end of the market turmoil than the beginning.”

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Scholes, Nobel Laureate, Says Credit Crisis May Not Be Over
Vivien Lou Chen and Thomas R. Keene
Bloomberg, May 16 (2008

Paulson Says Capital Markets Show ‘Signs of Progress’
John Brinsley
Bloomberg, May 16 2008

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  1. Simon commented on May 19

    Paulson seems really on to it. He’s obviously got major reservations about the strength of the US economy this lends strength to his overall optomism. He seems to be saying that if the US can just make it through the next..few months? years? the dollar will correct and reflect renewed economic strength. It was great to hear him talk enthusiastically about energy policy and cooperation with China.

    However like many others I believe that the US is very vulnerable to shock and the chances seem high that something out of the blue could easily upset the delicate balance engineered by the fed.

  2. dblwyo commented on May 19

    We also should remember who’s required to talk which book…and the Treasury Sec’y’s job is to be as optimistic as events allow. The fireman doesn’t stand in the theatre and yell fire after all. That said I happen to agree with Paulsen that the crisis is past us in the sense that the markets are beginning to work again vs the threatened collapse. Which means they crunch where a vicious feedback between tightening loan standards feeds an already slowing economy. And a slowing economy leads to more loan losses for real on the balance sheets and more writedowns, capital raising and dilutive stock issuance. IMHO we’re just starting the real downturn in the economy and all the data bear that out; notwithstanding the optimism of the IBank’s CEOs (who are very definitely talking their books).

  3. Philippe commented on May 19

    At risk of being a party popper , the banking sector is still in full state of flux the following may help and this is only an excerpt of their road to Canossa

    Euribor ONE YEAR at almost 5%
    The banks attic is still a junkyard


    Goldman’s share of Level 3 assets, the firm’s hardest-to- value, surged 39 percent to $96.4 billion at the end of February from $69.2 billion in November, according to a filing with the U.S. Securities and Exchange Commission today. The ratio of Level 3 to total assets rose to 8.1 percent from 6.2 percent.

    Their profit statement are dubious HSBC is even not writing off the straight forward consumers loans financing bad debts

    They have taped all the goodwill possible in their last rights issues are increasing their cost of fundings
    The Fed is requesting the congress to approve payment of interest on the Banks reserve
    Source Mish

    Citigroup sold perpetual preferred shares after posting almost $16 billion in write downs, increasing the New York-based bank’s total capital raising since November to $37.2 billion, Bloomberg data show. The sale helps compensate for more than $40 billion of credit losses and write-downs since last year.

    The perpetual hybrid bonds pay interest of 8.4 percent for 10 years. After that, if not called, the interest rate will begin to float at 4.03 percentage points more than the London interbank offered rate, or Libor, which is currently set at 2.91 percent.

    They have not shown their losses yet!

  4. larster commented on May 19

    This is the same guy that said the subprime problem was contained over a year ago. I really have no idea where we are at due to so many conflicting statements by all the players. In times such as these I revert to common sense and that tells me that we have a ways to go in this journey. Housing is still going down, the car business is flatlined, all airlines are staring bankruptcy in the face, oil continues it’s march upward, food prices keep rising, etc. Where is the catlyst that will turn the economy around? Did i mention that we still have 7-8 months of an administration that is over? I would hope that rather than cheerleading, the treasury head is looking for trouble spots in an effort to head them off. I am afraid that this is fantasy.

  5. constantnormal commented on May 19

    Surely with this amount of visible carnage (and who knows what still lurks below the waterline), it is not realistic to expect that only Bear Stearns will sink beneath the waves.

    There will certainly be (at least) one more major investment banker or commercial bank to be unable to withstand their losses and expire. The players in the industry are nervously playing a game of musical chairs, wondering which of them will be without a seat when the music stops next.

  6. Tom F. commented on May 19

    Paulson is just flat-out full of shit.

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