More on housing not being over yet

Wow! This is truly astounding. This FT article really is scary. I've been pessimistic about housing and finance companies, but this latest information is truly shocking.

Say goodbye to a couple of homebuilders. Expect the dollar to fall further. Hold on to those oil & gas, gold, and metals stocks.

The financial meltdown ain't over yet!

From the FT:

Big US commercial banks have seen $280bn of new debt come on to their balance sheets since the credit squeeze, threatening to undermine economic growth by inhibiting their ability to make new loans.

The banks have been forced to take on to their books large amounts of commercial paper and leveraged loans after investor demand for such assets dried up in the summer.

David Rosenberg, economist at Merrill Lynch, said that this amount had risen to $280bn since the start of August.

He added that according to data from the Federal Reserve, large bank capital - represented by net assets - had declined by $40bn since the beginning of August. "This has never happened before over such a short timeframe and this is rather serious because such a steep and sudden compression in large-bank capital has the potential to create a negative lending environment," he said.

If left unchecked, this could "significantly inhibit" economic growth, he added.

European banks are facing similar pressures with many observers expressing concern at the ability of some smaller lenders to handle the potential strain on their balance sheets.

Fears over the effect of the credit squeeze on US bank balance sheets was one factor behind the US Treasury's encouragement of the creation of a "super fund" to take on the assets of troubled investment vehicles.

The three top US banks - Citigroup (NYSE:C), JPMorgan Chase and Bank of America - this week unveiled plans for a fund that would buy up to $100bn of mortgage-backed assets from structured investment vehicles.

Citigroup, which manages $80bn of assets in such vehicles, has bought some of the vehicles' commercial paper.

On Monday, Citi said it was suspending share buy-backs because its capital ratios had weakened partly due to the large amount of commercial paper and leveraged loans it had taken on.

According to Moody's, the credit rating agency, assets held by bank-sponsored special investment vehicles fell to $320bn from $395bn in July.

"The large banks have been forced to take commercial paper back on their balance sheets and as a result are choking on assets they did not plan on having - thereby tying up regulatory capital and in turn possibly leading to a reduction in credit extension," said Mr Rosenberg.

He pointed out that 30 per cent of the growth in the debt that US households took on was backed by asset-backed investors.