Daniel Alpert of Westwood Capital and Jerry Webman of Oppenheimer Funds were recently on CNBC discussing the credit markets. Alpert mentioned that while the panic has left the market, and many banks are doing well due to widening credit spreads, the spreads are wide in-part since the assets on which many of the loans are made are still underwater. This gives room for some concern. Alpert also believes that while the recent funding for CIT was a positive, a bankruptcy at CIT is still about 50-50 given that their collateral will be difficult to collect upon. Alpert also still has some worry as to whether there will be enough capital available in the markets and banking system to absorb the level of losses that will still need to be taken.
Webman was a little more encouraging and believes that it is a positive that private funding was available for CIT. Nonetheless, credit spreads in the investment grade area are still pricing in defaults and poor recoveries at 4-5 times the historical averages, signaling that people are still cautious. Webman did mention one good trend that is showing up - people are breaking apart the "toxic" assets into their good and bad component parts, with the good assets being put back into less toxic and less complicated assets. This is good since banks are trying to become more capital transparent, which will allow them to make more loans of the type that CIT made. This makes a CIT-type of failure less difficult to deal with, and may explain the somewhat muted market reaction. Webman also believes that the latest earnings news is illustrating a gradual rebuilding of economic momentum, and strength in many parts of the financial world. With the current playing field, the big players will continue to be able to make money, even without the extreme levels of leveraged that were observed in the past.
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