IMF Economist: Credit Crisis to Worsen; Large Bank May Fail

"The worst is yet to come in the U.S.”
-Kenneth Rogoff, former chief economist at the International Monetary Fund

Unfortunately, I have to agree. We have yet to really feel any severe impact from the credit crunch in the broader economy, or in the markets.

Excesses in one direction lead to similarly severe unwinds in the opposite direction. Hence, the unbridled credit creation in the early part of the decade is now being met with credit tightening. Any asset class that depends too heavily on credit for price appreciation — think private equities, homes, and even some forms of stock activity like share buybacks and IPOs — are now going through a period of price depreciation.

From Bloomberg:

"Credit market turmoil has driven the U.S. into a recession and may topple some of the nation’s biggest banks, said Kenneth Rogoff, former chief economist at the International Monetary Fund.

"The worst is yet to come in the U.S.,” Rogoff said in an interview in Singapore today. "The financial sector needs to shrink; I don’t think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job.”

The U.S. housing slump has triggered more than $500 billion of credit market losses for banks globally and led to the collapse and sale of Bear Stearns Cos., the fifth-largest U.S. securities firm. Rogoff said the government should nationalize Fannie Mae and Freddie Mac, the nation’s biggest mortgage-finance companies, which have lost more than 80 percent of market value this year.

Freddie Mac and Fannie Mae "should have been closed down 10 years ago,” he said. "They need to be nationalized, the equity holders should lose all their money. Probably we need to guarantee the bonds, simply because the U.S. has led everyone into believing they would guarantee the bonds.”

While I agree that Phony and Fraudy are no longer viable companies, the burden shouldn’t be shifted onto the taxpayers merely because the corrupt management — when they weren’t busy committing accounting fraud — managed to dupe a bunch of bond buyers into thinking their paper was US guaranteed.

That everyone in this country is on the hook for the bad actions of corporate weasels is beyond sad — its pathetic . . .


Strongest & Weakest US Banks and Thrifts (August 2008)

Large U.S. Banks May Fail Amid Recession, Rogoff Says
Shamim Adam 
Bloomberg, Aug. 19 2008

Lehman May Put a Prized Unit on the Block   
NYT, August 18, 2008   

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. David Rosenberg commented on Aug 19

    Consider that what we have seen occur thus far in terms of the credit crisis has merely been the unwinding of one of the biggest asset bubbles and leveraged bull markets in modern history. We have yet to see the credit deterioration that typically occurs in a consumer recession, which has now arrived after a long lag. This phase of consumer-led financial strains is only just beginning, which is why talk of a “bottom” in anything from credit to housing to equities is far too premature, in our opinion”.

  2. Rob P commented on Aug 19

    Now just wait a damn minute! Fannie and Freddie were marketed as explicitly backed by the Government! You mean to tell me they were improperly marketed???? Where are those Federal Regulators that “negotiated” the deal for ARS repurchase? I want all my shares of Fannie and Freddie repurchased… I believe Paulson has a check that should cover it!

  3. John commented on Aug 19

    BR: Let me get this clear are you suggesting F/F should default on their debt. Simple question requiring simple answer. I agree with Rogoff they should be nationalized and the stockholders wiped out but defaulting on the debt is a very different matter. I also agree with his other view that this recession is only just starting.

  4. wally commented on Aug 19

    “That everyone in this country is on the hook for the bad actions of corporate weasels is beyond sad — its pathetic”

    The big disasters never come from a single event, but rather from a confluence of things. We are also on the hook for the Fed’s too-low rates, for the price bubble we allowed to happen, for all the bad decisions by millions of ordinary people, for the lax rules on the mortgage industry, for thinking we could live on credit, for thinking every US home needed countertops that would outlive the house by 10,000 years, for greedy investment strategies by banks, insurance companies and pension plans… and on we could go.

  5. rww commented on Aug 19

    BR: OT but what did you see in yesterday’s market action that led you to ask your “fundamental, technical, psych” question yesterday?

  6. Rob P commented on Aug 19

    John: “…countertops that would outlive the house by 10,000 years!”

    Thanks for the laugh! That is a good one!

  7. Philippe commented on Aug 19

    In the last real estate, slump ( 90’s) major creditors of F/F were seeking through the US congress confirmation of an explicit USA sovereign risk. Improvement of the real estate market and amnesia, the most perjuring quality of the financial sector have made miracles and the subject was left aside, the legal issue is still to be addressed.
    The assets of F/F have been swelling and the longer this legal vacuum is left unanswered the more profitable is the illusion to bank on a legal flaw.

  8. Francois commented on Aug 19

    “That everyone in this country is on the hook for the bad actions of corporate weasels is beyond sad — its pathetic . . .”

    In the country called the United States of America, (USA) this should not happen.

    Alas, we now live in the country called the United Corporations of America. (UCA) Thus, no one should be surprised by the socialization of losses. After all, the UCA was designed for that, no?

  9. David commented on Aug 19

    Well, if they can put Ken Lay et al. on trial, why not Franklin Raines, et al?

    Oh yeah, because Dems run congress. Never mind.

  10. John(2) commented on Aug 19

    BR: on the subject of weaselling how about a response on the F/F debt default. Or were you just getting us all fired up?

  11. SeamusAndrew.urphy commented on Aug 19

    If the implied backing is going to become actual by F&F being nationalized, then there is a very real question regarding the rates paid on the bonds. If they have the same guarantee as treasuries then they are treasuries and there is no reason to guarantee any rate higher than treasuries…but how do ya’ do that?

  12. John commented on Aug 19

    David: I wonder if you know how the govt works. Prosecutions in matters like this, as distinct from impeachments, are initiated by the DOJ or by state AG’s. The last time I checked the DOJ was run by a Republican administration. Never mind.

  13. MarkD commented on Aug 19

    OT What happened to ciao,ms & cinefoz???

    you didn’t ban them did you??

  14. dblwyo commented on Aug 19

    Ironically just read the best assessment of where we are and are headed in Mauldin’s latest outside the box. It’s ML letter from a certain David Rosenberg that is presented as “outside” but with whose analysis I agree on my own digging completely. But it takes it further into earnings, de-liquefaction and de-leveraging, the impact on profits and PEs and the resultant outlook for the markets. VERY solid piece of work and courtesy of the network public:
    If you read nothing else….

  15. TED commented on Aug 19

    Don’t forget the past ….

    August 19 1998: Russia fails to pay its debt on GKO’s short-term treasury bills, officially falling into default. The IMF and Group of Seven (G7) say they will not provide additional loans to Russia until it meets existing promises

  16. Greg0658 commented on Aug 19

    IMF Kenneth Rogoff – “They need to be nationalized, the equity holders should lose all their money”

    NOT how about Nationalize F&F; the execs loose their jobs and pensions; the bond holders get their jobs

  17. Greg0658 commented on Aug 19

    “if they can put Ken Lay et al”

    I would like to have his body exhumed and independently tested – that was way to convienent

  18. Entrepreneur commented on Aug 19

    “That everyone in this country is on the hook for the bad actions of corporate weasels is beyond sad — its pathetic…”

    I certainly agree with the sentiment, but take issue with target of blame here.

    In the rush to lynch everything corporate, I think we are once again going to miss the real demon in this design… the government.

    It is a long stretch to digest what’s gone on at FNM and FRE and lay the blame squarely at the foot of corporatism. A corrupt Congress, and oblivious (or complicit) Executive, pseudo-management teams that are nothing more than political cronies being paid off and maintaining the donation gravy train… there’s your villain.

    If the net result of this sorry episode is to slay corporations in favor of the crooks in Washington that sponsor them, we’ll have made a bad mistake. That’s like killing the drug addict and then putting the dealer in charge of reform.

  19. tyaresun commented on Aug 19

    The equity holders will be wiped out. The bond holders will take a haircut by an amount equal their interest accrued over and above treasuries.

  20. Innocent Bystander commented on Aug 19

    Franklin Raines stole 90Million, and got a pension I beleve of 1 million for his fine leadership. Now you say taxpayers have to bail out F&F?

  21. Stuart commented on Aug 19

    Apparently Rogoff didn’t read the script of the “Confidence Game”.

  22. Karl smith commented on Aug 19

    This brouhaha over the Treasury backing Fannie and Freddie bonds is foolish in my opinion. The bonds always had an implicit backing.


    Virtually all of the spread of Agencies over Treasuries was because of the prepayment option inherent in Agencies. There was no credit risk spread and that is how FNM and FRE where able to dominate the market.

    No one was complaining about 50 years of cheaper conforming mortgages so I think its is pretty ingenious for people to be complaining about it now.

  23. zot23 commented on Aug 19


    You say, ” Any asset class that depends too heavily on credit for price appreciation — think private equities, homes, and even some forms of stock activity like share buybacks and IPOs”

    So what are asset classes that do not depend on credit for price appreciation? Or what are assets that increase in value when credit contracts? Cash. Is there anything else?

    Still learning, thanks for any info.

  24. Saul Sterman commented on Aug 19

    Come on Barry, since when do you quote Rogoff?

    I haven’t commented on any of your articles in over six months, but this one…maybe you were just having a slow day or something.

    May I mention to your readers that just because Rogoff is at Harvard it doesn’t mean that he gets it right more than half the time. Look at his track record at the IMF from 2001 to 2004 and..well judge for yourself.

    More recently:
    or maybe you suddenly agree with Rogoff that the answer to all our problems is to slow down global growth to a crawl and somehow/miraculously all US problems will disappear… as he writes in this article here:

    Saul Sterman

  25. Mark E Hoffer commented on Aug 19

    I’ll second S. Sterman’s take, the IMF has killed more Economies that is healthy to think about. We invite them into our processes, let alone our ‘Country’, at grave risk.

    BR, seriously, what’s up with choosing to amplify that signal?

  26. rapa commented on Aug 20

    I am wondering which one would it be? Guess it would be an investment bank in Wall Street…

Read this next.

Posted Under