Posted on 8/13/2007, 2:41:27 AM by blam
Markets fear there is more to come
By Katherine Griffiths City Correspondent
Last Updated: 12:15am BST 13/08/2007
Turmoil is expected to continue in global stock markets as fears abound that some of the world's biggest banks might be sitting on heavy liabilities from the US sub-prime meltdown.
US housing crisis deepens
Deutsche Bank and Commerzbank are among the latest banks to be caught up in the maelstrom because they are creditors to HomeBanc, the US mortgage company which filed for Chapter 11 bankruptcy protection at the end of last week.
BNP Paribas, which sent shockwaves through the financial markets last week when it admitted it had frozen just over £1bn of funds after problems in the US sub-prime market, has also emerged as a creditor to HomeBanc.
Regulators and other market participants are searching nervously for where the biggest problems lie after the collapse of several US sub-prime mortgage providers.
Gilles Moec, senior economist at Bank of America, said: "One of the big issues is that no one has any real clue of the amount of sub-prime loans which have been purchased by foreigners."
The evidence remains anecdotal. Citigroup lost more than $700m (£346m) on credit securities in July, making it one of the bigger casualties.
advertisementThere is speculation that Goldman Sachs has suffered substantial losses in its $9bn Global Alpha hedge fund, while the shares of Man Group, the largest quoted hedge fund in the world, slumped 9pc on Friday on fears its trading strategy based on quantitative modelling has led to a heavy fall in the value of its funds. Man has put its planned US listing on hold.
Other financial institutions have seen an opportunity in the market conditions. It's emerged that HBOS, owner of Halifax and Bank of Scotland, offered to buy AAA-rated debt from companies prepared to accept deals valued at about 95p in the pound.
All eyes will be on America's Federal Reserve for signs it will repeat last week's cash injection into the banking system to stave off a credit crunch. The Fed's chairman, Ben Bernanke, is coming under pressure to take even bolder action by cutting interest rates.
Sources said banks effectively stopped lending money to each other at the end of last week as they shored up their own financial position and sought to avoid extending credit to institutions which might be sitting on undisclosed losses.
One banker said the real problem was not the overnight lending market - which has been eased by the capital injection by the Fed and the European Central Bank - but the "term financing" market for loans of about three months. Central bankers by late Friday had restored an uneasy calm to panicky financial markets by injecting a massive and unprecedented $323bn into money markets.
Some in the City are frustrated that the Bank of England has taken no action to help ease the strain on banks and other institutions.
Sources said there had been several phone calls over the weekend between senior officials at the Bank, the Financial Services Authority and the Treasury, but that the Bank believes there is enough liquidity in the UK to keep the market on track.
Alistair Darling, the Chancellor, yesterday flew back from holiday to take charge of the Government's response to the financial instability.
Some market watchers believe the FTSE 100, which suffered its worst fall for more than four years on Friday, may test the psychologically significant 6,000 mark this week.
So I guess the markets really fear that there is less to come, not more.
I predict the markets end up at the end of the week.
Is this not the definition of “hysteria”?
Hellooo Keating 5 and the S and L crisis of the 80’s!
Can’t anybody stand on their own two feet anymore?
If you were dumb enough to extend your dreams beyond your means.. so be it. And if your stupid pension plan invested in risky stuff then get mad at them... Safe investments have no place in volatile markets..period.
End of Story.
SJB, What’s your take on this?
There might be a lot of collateral damage which has little to do with mortgages, if the losses being incurred trigger margin calls. Assets will have to be sold quickly to meet the margin calls, so many otherwise solid stocks will be taking a beating. Eventually, this will be good news for people who can find the good stocks and buy when the large institutions are selling them for a discount.
There’s been some shaky mortgages in the UK as well - loans of up to six, seven times income and rates there tend to float, any fixed rates reset after a year or two. Much of the boom in UK has been financed by HELOCs etc and now rates are rising with more to come. Gordon Brown’s bubble is reaching its elastic limit.
Meanwhile, today, Asia doesn’t seem too upset (so far). http://www.marketwatch.com/?siteid=mktw
So, go right ahead and give me that BHP at fire sale prices. And RIO, pennies from heaven.
This is far more than a liquidity crisis. In a liquidity crisis, entities such as homes, buisnesses, etc. will liquidate assets or come up with the money to cover their liquid needs. This is additionally a credit derivitive instrument crisis that may unravel totally before our very eyes. No one knows the size of the credit derivitive market, but the IMF states in its monthly statements that it exceeds the TOTAl debt of the USA. This is where the potential for dislocations like we have not seen in our lifetimes could occur. I am not saying it will not be contained, but for the ignorance of the public in these matters, containment could be one hell-of-a-problem. This is much more than a million homes being reposessed. The failed hedge funds just cracked open the books on the the mortgage bond writers and their underwriters no longer want to buy ANY of their paper.
YOu are witnessing history in the making as of Friday, Saturday, Sunday, and most people don't even realize this is one of the most, if not the most, consequential event in the history of this country.
Well, they were up last week, kind of odd for all the doom and gloom.
This year's excuse has been the housing sector of the economy.
Worth a little "fleshing out" IMO: to those who say these particular "repurchase agreements" are not a Fed bailout, I ask, why would the institution that pledged these as "collateral" not simply default on them? There's your bailout.
The Fed is accumulating billions and billions of dollars worth of CDO's that will simply go off the books. The properties represented will eventually be quietly doled out to our betters more or less for free, a la the RTC back in the early 90's.
‘There’s been some shaky mortgages in the UK as well - loans of up to six, seven times income and rates there tend to float, any fixed rates reset after a year or two.’
But in the UK property prices and demand continue to rise faster than the cost of repaying the mortgage interest, unlike in the US. If the property market slows like in the US, the same will happen here, but UK lenders are more conservative when it comes to sub-prime clients.
Probably because the FOMC's method of operating is to buy the highest quality securities from the biggest financial institutions. It wouldn't be in their best interest to simply walk away.
LOL you know which ones I mean, the latest CDO crap.
I knew this was coming 1 1/2 years ago.
No bragging here....I just saw the quality of loans originated go to hell in a handbasket.
They were writing loans at 95% for people with half a dozen collection accounts and no income verification for the last several years. I would rather not name names, but many of
the big lenders are in it. Then the securitized the debt
and off to Wall Street. The fallout will be serious.
Hmmm. There is an old saying:
If you owe the bank more than you are worth, the banker owns you. If you owe the bank more than the bank is worth, you own the banker."
Most of the time, only the first part of the saying comes into play, but during the real estate bust in Texas in the mid 1980s, I did see instances where banks or savings in loans refused to call problem loans because doing so would have demonstrated that the bank was in fact, insolvent. The bank was not prepared to go out of business, so they just kept rolling over loans, or ignoring unmade payments, hoping to get out of the mess one day.
I wonder is some of these big lender figure that if they are collectively all on the line for enough to endanger the US Banking system, that the Federal Government will not be prepared to shut them all down and see a collapse?
To go back a few more years into the 1980s, Texas banks that made loans to oil producing companies were shut down by the regulators, when the price of oil fell by 2/3 and domestic oil compnaies could not repay their loans on time.
New York City banks that made loans to oil producing countries were bailed out when the price of oil fell by 2/3 and those countries could not repay their loans on time. The Feds calculated, correctly, that the national economy could survive a banking calamity in Texas. The feds also calculated, possibly correctly, that a banking calamity in New York City would send the national economy into collapse.
Given the concentration of the banking industry into a small number of very large institutions, the danger of a few pulling the whole system down seems even extreme.
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