While I’m not necessarily expecting a 2008 style market meltdown, I do see some bigger picture similarities.
Here is the short and simplistic version of it.
Leading up to the housing bust we all know the banks loaned money to anyone that could fog a mirror to buy a house. That was because “experts said” home prices would always rise or at least maintain their value and could be resold in an instant if the borrower defaulted (so they thought). You know the rest of story and I’m not going to get into that here.
This is about the current similarity.
Having been bailed out from that mess the banks wised-up and clamped-down on loaning money to “people”. Sometimes people suck at paying back loans they can’t afford and shouldn’t have taken out in the first place.
But several years later when the “oil boom” started they thought, “hey this is great. We’ll loan money to these “companies” to pump oil out of the ground. They’ll most certainly have the cash flow to pay back the loan. We’re talking oil here”.
Screw loaning money to people, loaning money to companies is the way to go.
Suddenly South Dakota was the place to be. Prostitutes flocked there and anyone with a truck showed up to live in their trucks whilst making $100 an hour, according to what I heard on CNBC. It was Oil Boom v2.0. They even did a Special Report.
Back at the TBTF banks, guys wearing neckties used Excel spreadsheets to extrapolate the price of oil at the time (probably somewhere around $100) and crunched the numbers. “No worries at all” they thought, “these guys will have excellent cashflow, even if oil drops to $70”. We brought in a team of experts with superb hardhats that have assured us oil prices would remain stable.
But as we know now, all the “experts”, even the ones with the finest neckties and hardhats, failed to foresee the price of oil collapsing into the 30’s or even the 20’s and now there’s a problem.
Houston – we have a problem.
A survey of experts from last June
As we know, back in 2008 when home prices started falling it caused a lot of problems for the “too big to fail” banks. I’m starting to think they have a new problem.
The same thing is happening again only this time it’s oil prices. And the TBTF banks are WAY TOO BIGGER TO FAIL now. (that’s for a different post)
At this point we can only hope they re-packaged the loans and resold them to entities we hate (just like last time) to help mitigate the damage when the defaults start. Maybe they had the foresight to let the credit rating agencies work their magic again this time.
If I close my eyes and stand on my head I can foresee a situation where the Fed has to step in again and provide “liquidity” to the mess that banks have once again created for themselves. Let’s hope it doesn’t come to that.
Once was enough.
Anyway, rather than go into a long and complex post full of details, I just wanted to point out the similarity and your train of thought can take you were mine went.
I posted this chart on the old blog and since it’s not too old I’ll just use it again here.
I made a joke a while back on Twitter.
They don’t have to call it QE4. They could give it a nice name like “liquidity enhancement program” or something.
Now I’m off to take a closer look at bank exposure. It’s probably nothing to worry about really.
I’m sure they learned their lesson about loaning money assuming the underlying “asset prices” would be stable into perpetuity.
Nothing else to see here… please move along.