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"I am not a forecaster of the future; I'm a historian. And history says this will blow up. It always has. And there will be some blood on the street." — Wells Fargo & Co. Chief Executive Officer Richard Kovacevich, in December, 2006.v
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May 9 (Bloomberg) -- Bank of America Corp. Chief Executive Officer Ken Lewis said a so-called credit bubble is about to break after six years of historically low interest rates and relaxed lending criteria.
``We are close to a time when we'll look back and say we did some stupid things,'' Lewis said, speaking at a lunch at the Swiss-American Chamber of Commerce in Zurich. ``We need a little more sanity in a period in which everyone feels invincible and thinks this is different.''
Demand for so-called junk bonds is close to its highest in a decade, while risk premiums are near their lowest level in a decade. Investors demand an extra 2.69 percentage points to own high-yield, high-risk securities instead of Treasuries, about 2 percentage points less than the spread's 10-year median, according to Merrill Lynch & Co. index data.
The spread on Feb. 22 came within 5 basis points of the all-time low of 2.44 percentage points, set on Oct. 17, 1997.
Junk bonds are rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's. Bank of America has been the No. 2 arranger of high-yield loans every year since 2000, according to data compiled by Bloomberg.
Lending rates for companies rated four or five levels below investment grade are only 28 basis points higher than their all- time low in February of 2.12 percentage points over the London interbank offered rate.
Bad Deal
Lewis, 60, said ``We need a deal to go bad, as long as we're not in it.''
The global high-yield default rate fell to 1.5 percent in April from 1.7 percent at the end of 2006, its lowest year-end level since 1996 and its fifth straight annual decline, according to Moody's.
Defaults will rise this year, according to Edward Altman, a New York University professor who in the 1960s created a widely used mathematical formula that measures the risk of corporate bankruptcy. Altman predicts 2.50 percent of the $1.1 trillion junk bond market will default this year, up from 0.76 percent at the end of 2006. The rate will climb to 2.72 percent in 2008, he said in January.
Some bank executives, including Barclays Plc President Robert Diamond, say the credit rally may run longer.
``I think the liquidity is probably a little bit more sustainable than he would think,'' Diamond said in an interview today. ``Only time will tell.'' He said bond yields are increasing and volatility ``will be back.''
LaSalle Bank
Charlotte, North Carolina-based Bank of America is trying to buy the LaSalle unit of Amsterdam-based ABN Amro Holding NV for $21 billion.
Lewis, who started his career as a credit analyst, also said ``risk is being distributed so much more effectively than in the past'' because it's ``spread across a broad range of investors.''
The chief executive said that while the bank has turned down some corporate customers as too risky, ``the deals we've turned down have been taken up quickly by others.''
Lewis said real estate prices, punctured by defaults among subprime borrowers, should stop falling by the end of this quarter, ``and won't drift over into the prime or super-prime market.''
While wages and employment are rising, ``people won't be giving up their homes in that environment,'' Lewis said. ``The subprime market was exacerbated by poor lending techniques by a few.''
No Subprime
Bank of America is ``not considering doing subprime'' mortgages, Floyd Robinson, its mortgage head, said in a May 7 interview, even though the sale or closure of at least two dozen companies focused on lending to borrowers with poor credit or high debt within the past year has lessened competition.
Lewis's comments were preceded by some pessimism from Wells Fargo & Co. Chief Executive Officer Richard Kovacevich who said in December that ``I am not a forecaster of the future; I'm a historian. And history says this will blow up. It always has. And there will be some blood on the street.''
May 9 (Bloomberg) -- Bank of America Corp. Chief Executive Officer Ken Lewis said a so-called credit bubble is about to break after six years of historically low interest rates and relaxed lending criteria.
``We are close to a time when we'll look back and say we did some stupid things,'' Lewis said, speaking at a lunch at the Swiss-American Chamber of Commerce in Zurich. ``We need a little more sanity in a period in which everyone feels invincible and thinks this is different.''
Demand for so-called junk bonds is close to its highest in a decade, while risk premiums are near their lowest level in a decade. Investors demand an extra 2.69 percentage points to own high-yield, high-risk securities instead of Treasuries, about 2 percentage points less than the spread's 10-year median, according to Merrill Lynch & Co. index data.
The spread on Feb. 22 came within 5 basis points of the all-time low of 2.44 percentage points, set on Oct. 17, 1997.
Junk bonds are rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's. Bank of America has been the No. 2 arranger of high-yield loans every year since 2000, according to data compiled by Bloomberg.
Lending rates for companies rated four or five levels below investment grade are only 28 basis points higher than their all- time low in February of 2.12 percentage points over the London interbank offered rate.
Bad Deal
Lewis, 60, said ``We need a deal to go bad, as long as we're not in it.''
The global high-yield default rate fell to 1.5 percent in April from 1.7 percent at the end of 2006, its lowest year-end level since 1996 and its fifth straight annual decline, according to Moody's.
Defaults will rise this year, according to Edward Altman, a New York University professor who in the 1960s created a widely used mathematical formula that measures the risk of corporate bankruptcy. Altman predicts 2.50 percent of the $1.1 trillion junk bond market will default this year, up from 0.76 percent at the end of 2006. The rate will climb to 2.72 percent in 2008, he said in January.
Some bank executives, including Barclays Plc President Robert Diamond, say the credit rally may run longer.
``I think the liquidity is probably a little bit more sustainable than he would think,'' Diamond said in an interview today. ``Only time will tell.'' He said bond yields are increasing and volatility ``will be back.''
LaSalle Bank
Charlotte, North Carolina-based Bank of America is trying to buy the LaSalle unit of Amsterdam-based ABN Amro Holding NV for $21 billion.
Lewis, who started his career as a credit analyst, also said ``risk is being distributed so much more effectively than in the past'' because it's ``spread across a broad range of investors.''
The chief executive said that while the bank has turned down some corporate customers as too risky, ``the deals we've turned down have been taken up quickly by others.''
Lewis said real estate prices, punctured by defaults among subprime borrowers, should stop falling by the end of this quarter, ``and won't drift over into the prime or super-prime market.''
While wages and employment are rising, ``people won't be giving up their homes in that environment,'' Lewis said. ``The subprime market was exacerbated by poor lending techniques by a few.''
No Subprime
Bank of America is ``not considering doing subprime'' mortgages, Floyd Robinson, its mortgage head, said in a May 7 interview, even though the sale or closure of at least two dozen companies focused on lending to borrowers with poor credit or high debt within the past year has lessened competition.
Lewis's comments were preceded by some pessimism from Wells Fargo & Co. Chief Executive Officer Richard Kovacevich who said in December that ``I am not a forecaster of the future; I'm a historian. And history says this will blow up. It always has. And there will be some blood on the street.''
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