credit markets see improving liquidity despit

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    Credit Markets See Improving Liquidity, Despite GE Shortfall Ed Carson
    Fri Apr 11, 6:52 PM ET

    GE's first-quarter profit miss Friday signaled that credit woes aren't over. But other data point 15 improving market liquidity.


    General Electric (NYSE:GE - News) said credit markets seized up in late March after Bear Stearns' (NYSE:BSC - News) near-collapse, blocking asset sales and forcing it to take big impairment charges.

    The conglomerate's profit fell 8% vs. a year ago. It missed forecasts by 14%, the worst in years.

    GE shares gapped down and tumbled 13%. Financial stocks fell, but didn't collapse. The Spdr financial ETF (AMEX:XLF - News) slid 1.9% -- slightly less than the major averages -- though it lost 4.8% for the week.

    Interbank rates -- short-term loans between banks -- are as high or higher than at Bear Stearns' meltdown. That suggests banks are still reluctant to share cash.

    But they aren't running as much to the Federal Reserve for help. And they're getting rid of loans stuck on their books.

    Primary dealers bid just $39.55 billion Thursday for the Fed's $50billion Treasury auction. That suggests that liquidity has returned, at least for the high-quality mortgage securities.

    "Dealers have no immediate liquidity need, a very positive development, for today at least," Tony Crescenzi, chief bond strategist with Miller, Tabak & Co., said in a Thursday note.

    Meanwhile, investment bank borrowing from the Fed fell to $26.5 billion as of April 9, from $34.4 billion in the prior week and $37 billion two weeks ago.

    "The slowdown in the pace of the discount window tells us things may be improving a bit," said Tom Sowanick, chief investment officer at Clearbrook Financial.

    'Worst Is Over'

    The Fed let investment banks borrow directly from the central bank for the first time since the Great Depression in mid-March, after JPMorgan's (NYSE:JPM - News) rescue deal for Bear Stearns.

    "Opening the discount window when the Fed did was exactly what was needed," Sowanick said. "I think the worst is over."

    Investment banks are hopeful.

    "People are seeing the light at the end of the tunnel," Goldman Sachs (NYSE:GS - News) CEO Lloyd Blankfein said at its annual shareholder meeting Thursday. It may be the "beginning of the fourth quarter" in the credit crisis, though he cautioned a recovery would take a long time.

    Morgan Stanley (NYSE:MS - News) CEO John Mack said April 7 that credit woes are the worst he has seen in 40 years, but believes the crisis might be "in the final innings."

    Yet Goldman and Morgan Stanley last week also reported huge increases in hard-to-value, hard-to-trade mortgage debt and other assets on their books.

    Goldman's "Level 3" assets rose to $82.3 billion in February, up 50% vs. November, an SEC filing showed. Morgan Stanley's Level 3 assets surged 48% to $31.9 billion.

    Level 3 valuations essentially are guesses and can foreshadow write-downs. They're also a sign of frozen markets, as firms can't find reliable prices for their assets.

    But the February data are "old news, hopefully," Sowanick said.

    Investors might get a better sense of current conditions as JPMorgan, Merrill Lynch (NYSE:MER - News) and Citigroup (NYSE:C - News) all report first-quarter results this week, he said.

    Banks also are having some success unloading leveraged loans from underwriting takeover deals.

    "Things have been improving in the last weeks or so," said Steven Miller, managing director of the leveraged commentary and data unit at Standard & Poor's. "But it's only in the last week that people are beginning to believe the news is real."

    Citigroup was in talks last week to sell $12 billion in leveraged loans to private equity firms. The financial giant hasn't confirmed that the deal went through.

    Assuming it does, leveraged loans still on banks' books have fallen to $107 billion from $237 billion in July, Miller said.

    "People, at least in private equity, see some real value -- at a price," he said.

    Goldman last week dumped Chrysler-related debt for 62 to 63 cents on the dollar, sources said.

    Miller says that's due to auto industry woes and other special factors. Most leveraged loans are trading in the low 90s, he said.

    Banks largely have written down these assets, Sowanick noted, so they won't take a hit if they sell. In fact, he sees the possible "write-ups" in the fourth quarter.

    More broadly, there are hopes that the bulk of write-downs are behind Wall Street. Financial firms also are raising fresh capital.

    UBS' (NYSE:UBS - News) massive write-down and capital plans -- along with Lehman Bros.' (NYSE:LEH - News) successful convertible debt offering -- triggered a big stock rally April 1. That gain, however, largely has been retraced.

    Washington Mutual raised $7billion last week, lifting the thrift's shares despite heavy dilution for existing holders.

    "Since (mid-March), the market's feeling better, but no one wants to call a bottom because we've had some head fakes," Miller said.
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