Another in a regular series on blogs you may not be reading, but should be:

• Across the Curve. An astute and candid day-to-day look at the inner goings on in credit markets. Devastating stuff, of late.

New Greenwich Associates survey out on how credit market problems are hitting companies of all sizes, both in terms of their ability to get capital and in their economic outlook:

• Forty-five percent of large U.S. companies say their access to commercial paper markets has decreased as a result of the current market turmoil.
• More than 70% of companies say pricing on commercial paper programs has increased, including 22% that report their pricing has increased “significantly.”
• Forty-three percent of companies with more than $5 billion in annual sales say their access to commercial paper has been reduced, and among companies with annual sales of $500-$999 million, that share jumps to approximately two thirds.
• Almost a quarter of U.S. companies say these historic shifts in credit conditions have increased their needs for credit to fund ongoing operations.
• Smaller companies are feeling the pinch the most. One third of companies with annual sales of $500-$999 million say market turbulence has increased their need for operational funding.
• Among the industries with the highest proportion of companies saying they’ve experienced an increased need for operational funding are consumer goods (36%), industrial/transportation (28%) and financial institutions (26%).
• Forty-two percent of large U.S. companies also say their ability to secure revolving credit facilities has decreased or significantly decreased as a result of the current crisis in global credit markets, and more than two thirds say pricing on these facilities has increased.
• Hardest hit have been companies with credit ratings of BB or below, more than half of which say their access to revolving credit facilities has been reduced. 
• Sixty-two percent of companies say their ability to issue long-term bonds has been curtailed, including 64% of companies with more than $5 billion in annual sales.
• Seventy-seven percent of companies say pricing on long-term bond issues has increased, including 30% saying their costs of funding have increased “significantly.”
• It is interesting to note that companies with investment-grade ratings are more likely than their lower rated counterparts to say they’ve experienced an increase in pricing on their long-term bonds, at 83% to 66%.

And then on the economic outlook:

• Only 4% of companies think the economy will turn positive in the next six months; 47% expect the slowdown to last for 18 months or longer.
• Not a single company with annual sales of less than $1 billion thinks there’s any possibility of an economic rebound in the next six months.
• Mid-sized companies are especially gloomy in their outlook. Among companies with annual sales of $1-$5 billion, nearly 50% say the economy will not begin to recover for at least the next 18 months.
• Demand for the funding of capital expenditures is slowing. Sixteen percent of U.S. companies — including a quarter of consumer products companies and almost 25% of natural resource companies — say current market conditions have led to a decrease in their need for cap-ex financing.

I've been saying this privately for some time, but only now finally getting around to saying it here: In many ways, the banking crisis of 1872/73, less so the bank failures around the Great Depression, is the right mental model in which to think about the current crisis.

The context: A banking crisis in Europe took hold in 1872 after a mortgage lending boom, one in which house prices climbed endlessly, houses became loan collateral, and all sorts of dubious banking and lending behavior went on, much of it pushed by return-seeking banks. Everything came unglued in late 1873 as the European economy unwound and housing prices began falling, thus causing European banks to fail in a cascade, and interbank lending rates to soar as no bank knew which other bank would fail next. The problems spread to the U.S. in 1873, where debt-needy railroads began failing as European banks withdrew funding, this after a long boom had produced an over-levered mess, and then large numbers of U.S. banks followed afterward.

The whole thing took around four years to unwind in the U.S., and slightly longer in Europe. Admittedly, there was little done at the federal level to ameliorate things in any meaningful way, and there were widespread labor troubles at the same time, both of which helped cause the economy to stay down for the count, adding to the woes.

Nevertheless, people need to focus on the right things. And to my mind that is the banking crisis of 1873, and less so the causes and fixes of 1929.

More reading:

• The crisis of 1873: Perspectives from multiple asset classes (SSRN)
• The real Great Depression (Chronicle of Higher Education)

Some quick links to items of interest:

• Developer Sells Land Dirt Cheap To Reap Tax Benefits (WSJ)
• What Britain must do in the crisis (FT/Wolff)
• Private equity continues to have great parties, even if everyone's depressed (PE Hub)
• Unintended consequences of Bernanke/Paulson's actions (Bloomberg)
• Intermittently interesting Al-Jazeera (?) video on how Iceland got itself into the global credit bubble (YouTube)
• Market crises drive alcohol consumption, or at least beer sales (Anheuser-Busch)

A few people have sent over variants of this after my earlier post about hedge funds' cannibalism practices, so might as well post it. Here is a graph of the Goldman Sachs VIP index of most widely-held hedge fund positions as it has performed against the S&P 500 over the last few years, and then in the last three months. Think of the cross-over point at the beginning of September as hedgies getting a taste for consuming one another.

Some quick links to a few non-market things on this busy Friday after a crazy week:

• Photos: The sapphire mines of Madagascar (Boston Globe)
• Auto-correlation among car traffic in tunnels (arXiv)
• The evolutionary diversification of religions (arXiv)
• 25 years of conventional data analysis proves worthless in practice (Science)
• San Diego decides to cut all power in rural areas during wildfire crisis periods (SD U-T)
• Letter from sole dissenter in SEC's 2004 decision to allow increased leverage at investment banks (DaytonOS)

So let's say that TARP passes todaythe TARP bailout package has passed the U.S. House of Representatives.  I could be wrong, but that seems reasonably likely (although some disagree). What happens next?

Credit

My guess is that things settle down slightly in the credit markets, but that spreads remain gigantic, with destructive rates to the best borrowers, virtually zero lending to the worst, and interbank rates in nosebleed territory. The Fed will respond with more rate cuts, taking things to Japanese zero rate territory and more or less leaving it there. That won't change the problems materially, but it will take off some pressure.

Equities

After the initial post-passage nuttiness -- it seems like everyone I know is planning to sell into a same-day post-TARP rally, which could mean there won't be one -- equity markets could still surprise here, with it possible that we see a rally, even one that lasts a little while. After all, markets are at the lows of the year, there has been a parade of bad news, and the Dow has had only three up weeks since June, and no up month since April. Granted, we are likely set for the worst recession in recent history, but, as the kids like to say, the market newly knows that already. I think.

Municipals

Outside of corporates and equities, it is likely we will see some serious problems with the weakest debt-dependent cities and regions. They will be unable to borrow at rates that allow them to squeeze through any longer, and we will see stories about cities looking at cutting back to bare bones on essential services, plus failing colleges, etc. Expect oodles of those headlines, and more demands for bailouts.

Political

Some time after the U.S. presidential election, with credit markets still a mess, banks failing all over the landscape, and no real end in sight, we will likely see the new president pull together some sort of TARP II commission. What should we do, post-Paulson, to prevent this crisis from further deepening and continuing? Top of the agenda will be further fiscal stimulus, and, in all likelihood, an explicit recapitalization of the banking system, with government picking favorites.

Cheery thoughts. Feel free to disabuse me of them, of course. Or tell me I'm optimistic. Whatever works for you.

[Update] In updating this post post-TARP passage I lost the comments previously attached to it. Sorry, folks.

New chart out from the good folks at Bespoke showing that post-bailout credit default swaps on the banks and brokers have declined to merely catastrophic levels, down from apocalyptic earlier in the week. Whew!

Here is the quote of the day:

...we and other global firms have, for many years, urged the SEC to reform its net capital rule to allow for more efficient use of capital. This is the single most important factor in driving significant parts of our business offshore, so that our firms can remain competitive with our foreign competitors risk-based capital standards must become the norm. The SEC has made it clear that risk-based capital rules can be implemented only when the Commission is confident that firms employing value-at-risk models have robust credit and risk management policies in place.

Translated into English, this testimony from back in 2000 was from someone  asking that major brokerage firms be permitted to increase leverage subject to oversight of their wondrous mathematical risk models. The request was agreed to four years later, in 2004, and it helped lead to the meltdown in independent brokers this year.

The speaker? Some guy named Henry Paulson, the then-CEO of Goldman Sachs. I wonder what happened to him.

[Source]

In many ways, Citadel’s structure today is probably more akin to an investment bank such as Goldman Sachs than the average hedge fund on the street.

       -- Standard & Poor's, talking about hedge fund Citadel Investment

With hedge funds getting absolutely hammered with poor performance this quarter, the above comparison is likely not going to be seen as helpful. Citadel is down 18% for the year, which is awful, but still trails soul-crushing declines at Atticus (43.5% for the year) and elsewhere.

More here.

The next few weeks of C-Span will be like a new credit crisis reality TV show. Just look at all the upcoming hearings that will likely be broadcast:

October 8, 2008: Causes and Effects of the Lehman Brothers Bankruptcy
House, Committee on Oversight and Goverment Reform (Waxman)

Hearings to examine the regulatory mistakes and financial excesses that led to the bankruptcy filing by Lehman Brothers.

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October 9, 2008: Causes and Effects of the AIG Bailout
House, Committee on Oversight and Goverment Reform (Waxman)

Hearings to examine the regulatory mistakes and financial excesses that led to the government bailout of AIG. 

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October 16, 2008: The Regulation of Hedge Funds
House, Committee on Oversight and Goverment Reform (Waxman)

Five fund managers who earned over $1 billion last year have been invited to testify about the role of hedge funds in the financial markets and their regulatory and tax status. The five witnesses are John Alfred Paulson, President, Paulson & Co., Inc.; George Soros, Chairman, Soros Fund Management LLC; Philip A. Falcone; Senior Managing Director, Harbinger Capital Partners; James Simons, Director, Renaissance Technologies LLC; and Kenneth C. Griffin, Chief Executive Officer and Managing Director, Citadel Investment Group.

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October 22, 2008: The Breakdown of Credit Rating Agencies
House, Committee on Oversight and Goverment Reform (Waxman)

The CEOs of the nation’s three largest credit rating agencies have been invited to testify about the role of the credit rating agencies in the financial excesses on Wall Street. The three witnesses are Deven Sharma, President, Standard & Poor’s; Raymond W. McDaniel, Chairman and Chief Executive Officer, Moody’s Corporation; and Stephen Joynt, President and Chief Executive Officer, Fitch Ratings.

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October 23, 2008: The Role of Federal Regulators
House, Committee on Oversight and Goverment Reform (Waxman)

Former Federal Reserve Chairman Alan Greenspan, former Treasury Secretary John Snow, and current SEC Chairman Christopher Cox have been invited to testify about the role and responsibility of federal regulators in the Wall Street financial crisis.

As an aside, all of the above hearings are at 2154 Rayburn House Office Building if you're in the DC area. Should be fun.

Feel free add to this list via comments as you come across other upcoming hearings.