Bear Stearns Scares Up The Bears on Wall Street
Friday, August 03, 2007SUSIE GHARIB: A dramatic, late-day sell-off on Wall Street today, as stocks plummeted on new concerns about trouble in the credit markets. The Dow tumbled 281 points, with much of that loss coming in the final hour of trading. The NASDAQ fell 64 points or 2.5 percent. The sell-off was triggered when Standard & Poor's downgraded Bear Stearns' debt outlook to "negative" from "stable." Bear Stearns' CEO responded to the S&P action in a statement, saying quote, contrary to the rumors in the marketplace, our franchise is profitable and healthy and our balance sheet is strong and liquid. Then Bear Stearns chief financial officer told analysts on a conference call that he believes credit market conditions are quote as bad as I've seen it in 22 years, end quote. Joining us now with more analysis, Bruce Kasman, chief economist at JPMorgan. Hi Bruce.
BRUCE KASMAN, CHIEF ECONOMIST, JP MORGAN: Hi, how are you doing?
GHARIB: All right. So are credit market conditions the worst that they've been in 22 years in your view?
KASMAN: I wouldn't say that that's the case right now. I think we're in the midst of a significant repricing in credit. It's created quite a bit of dislocation and a logjam of credit in the pipeline that's not getting priced. But I think the financing of the broad corporate household sector continues here and what we have is a credit adjustment which is disorderly. It's creating risks but has not yet turned itself into what you might want to call a full-fledged shutdown or prices in the credit markets.
GHARIB: A lot of people talk about this pipeline of debt. How much are we talking about and who is affected by it?
KASMAN: Well, I'd say there's broadly speaking around $300 billion of LBO debt, of high-yield debt that is in the pipeline and is now sitting on the sidelines waiting to be priced. I think as we make our way through the next month or two, it's important for that process to begin to allow for the broader financing of the corporate sector to take hold. But it's not, I think, crucial that, that adjustment takes place very quickly here. I think the bigger issue in the very short term is the broader financing of commercial paper, prime lending in the housing market, things of that sort, which right now continue to move forward.
GHARIB: So how would you say is the status, the healthiness of the rest of the credit situation, outside of the sub-prime and the deal of pipeline debt that you're talking about?
KASMAN: Well, I think the fundamentals for the U.S. corporate sector right now are quite good, even for many of the companies who aren't able to place their debt right now. The problems I think we have right now are not one that the corporate sector is a serious threat to the economy. I think the problem is one of liquidity to the system drying up and creating problems of financing that feed back to the real economy. That's a legitimate concern, but it's still a concern right now, not a reality.
GHARIB: Some people are saying that if the Federal Reserve would just cut interest rates, this whole credit, prices concern would just go away. What do you think?
KASMAN: I don't think that they should be cutting now and I think what they will be doing next week when they meet is be signaling that they are standing ready to respond if something does emerge that's of the nature of a real shutdown in credit markets. Right now, I think they'll signal that risk but continue to reiterate their medium-term views that growth will continue moderate, that inflation will move lower and I think they'll also reiterate that their medium-term risk here alongside the growing near- term risk is that inflation will fail to moderate as they expect.
GHARIB: So is this just a Wall Street crisis or is this something that's going to affect the average person in America whether they're looking to get a mortgage or whether they'll lose their jobs?
KASMAN: Well, we're in the midst of a housing downturn which has been worsened by the tightening in credit conditions in sub-prime and some spillover into other parts of the housing market. That's going to continue. There will be job losses. There's going to be falling home prices that are going to continue as a result of it but so far, that's not the overall economy. The overall economy is doing reasonably well. If we're right and it doesn't materialize into a crisis, I think you'll see rather limited spillover effects more broadly as a result of what's happening now. But, again, there are risks here. I think the market is correct in pricing in some probability of an event happening. We don't think that's the most likely outcome, however.
GHARIB: All right, we'll have to leave it there. Thank you so much, Bruce. We really appreciate it.
KASMAN: Thank you.
GHARIB: My guest tonight, Bruce Kasman, chief economist at JPMorgan.
