Bonds signal a depression is ahead - banks need huge capital infusion

Both of the following news articles imply unprecended trouble ahead and the Paulson/Bernanke team does a miserable job to adress the problems. Paulson is even harming the process with these unbelievable stupid ideas and statements. Bush should retire early from his post and this transition is extremely harmful - the world needs strong and decisive leaders with ideas and guts, not Harvard educated morons.

Excerpt Bloomberg:

Junk Bond Yields Reach Record 20% as Economy Declines (Update2)

By Gabrielle Coppola and Caroline Salas

Nov. 19 (Bloomberg) -- Yields on speculative-grade corporate bonds surpassed 20 percent for the second straight day as a declining economy increased the risk of default.

The average yield on high-yield, high-risk debt rose to 20.81 percent today, from 20.14 percent on Nov. 18, the previous record, according to Merrill Lynch & Co.'s U.S. High Yield Master II index. The level is the highest since Merrill began collecting overall yield data in January 1986.

Junk bonds have lost more than $187 billion in market value since August on speculation the U.S. recession will leave a glut of companies unable to meet their debt payments, Merrill data show. General Motors Corp.'s announcement Nov. 7 that it may run out of operating cash as soon as this year stoked default concerns, said Martin Fridson, chief executive officer of money management firm Fridson Investment Advisors in New York.

``Prices are in a virtual freefall,'' Fridson said. ``Either the market is right and expecting a default rate considerably higher than it was in the Great Depression, or we have such profound dislocations and selling pressures going on that it really is creating extraordinary fundamental value.''

About 72 percent of high-yield issuers have bonds trading at so-called distressed levels, or with yields of at least 10 percentage points more than similar-maturity Treasuries, Merrill data show. That ratio implies a default rate of 18 percent in the next 12 months, according to Fridson.

`Economic Backdrop'

Before this year, the record high for speculative-grade bond yields was 18.3 percent in October 1990, when the yield on 10- year Treasuries was about five percentage points higher than it is now, Fridson said. High-yield, or junk, bonds are those rated below Baa3 by Moody's Investors Service and lower than BBB- by Standard & Poor's.

``People are just worried about the economic backdrop, they're worried about rising defaults,'' said Stephen Antczak, a credit strategist at UBS AG in Stamford, Connecticut.

U.S. Needs to Pump $1.2 Trillion Into Banks, FBR Says (Update3)

By Dawn Kopecki

Nov. 20 (Bloomberg) -- The U.S. may need to spend another $1.2 trillion to recapitalize the eight largest financial institutions and stabilize the markets because private investors won't take the risk, an FBR Capital Markets analyst said.

``The sheer size of the capital deficiency, coupled with the opaque nature of credit risk, will keep private capital sidelined,'' Paul Miller said in a research note yesterday.

Treasury Secretary Henry Paulson has committed $290 billion of the $700 billion Troubled Asset Relief Program to buying stakes in banks and in insurer American International Group Inc. to stabilize markets. Paulson said he wants to use the rest of the money to bolster lending for student loans, credit cards and auto loans. Miller, who's based in Arlington, Virginia, said Treasury's preferred equity investments aren't ``real capital'' and won't ensure the firms will survive.

Though Treasury's cash injections so far have bolstered bank capital, they give Treasury a senior repayment position that leaves common equity holders to absorb the majority of the losses, Miller said.

``Only injections of true tangible common equity will solve the current crisis,'' Miller said. Treasury spokeswoman Brookly McLaughlin declined to comment on Miller's report.

Losses Loom

The eight largest U.S. financial companies, including Bank of America Corp. and JPMorgan Chase & Co., have a combined cushion of roughly $405.7 billion in ``tangible common equity,'' FBR estimates. They also have as many losses, $408.3 billion, on their balance sheets that will eventually hit earnings and wipe out that equity.

``If losses are large enough to affect book value and stock price significantly, a company's probability of failure increases, regardless of the level of preferred or regulatory capital,'' he said. Miller is the world's most accurate bearish equity analyst, according to a Bloomberg survey of stock picks of 3,000 analysts at 432 research and investment firms worldwide for the 12 months ended March 31.