Friday, 10 August 2007

Possibly "The Worst Banking Crisis since 1931"!

Things are happening quickly. Joe public haven't got a clue because the media tells them nothing but nursery rhymes. To be educated today you need to KNOW about economics and fractional banking.

ECB steps in as lending rates rocketBy Ambrose Evans-Pritchard
Last Updated: 12:35am BST 10/08/2007
Whether it was news that BNP Paribas had suspended three funds caught in the US sub-prime swamp, or wild rumours about Goldman Sachs's hedge funds, or the delayed fallout from the €8.1bn (£5.5bn) state rescue of Germany's IKB bank, global confidence has finally buckled and led to a near total seizure of the credit markets.
Comment: ECB’s con trick won’t restore faith
The views from the trading floor
Frantic Wall Street scenes
Europe's overnight lending rate - the lubricant of the financial system - burst out of its tight 4pc band, surging by an almost unprecedented 62 basis points yesterday morning as banks cut off funding to each other for routine business. It looked alarmingly like the onset of a full-blown credit crunch.
The European Central Bank stepped into the market, offering unlimited credit - something it had resisted even in the aftermath of the 9/11 terrorist attacks in 2001. The banks gobbled up €95bn yesterday, bringing the crucial interest rate back down to its target of 4pc, although it is far from clear that this will be enough to end the panic.
"Anybody who has been on holiday has come back to face a different world. It's the Wild West right now," said David Bloom, chief currency strategist at HSBC.
Had the ECB let events run their course, the overnight spike would have amounted to a sharp tightening of monetary policy at a dangerous moment and set off a chain reaction through the bond markets.
Jochen Sanio, the head of Germany's regulator BaFin, had seriously spooked investors days earlier with a warning that his country may be facing the worst banking crisis since 1931 - an allusion to the collapse of Austria's Kredit Anstalt, which set of a wave of bank failures across central Europe. It is unclear whether Mr Sanio, and the ECB itself, is privy to something that has yet to hit the media.
The relentless drip-drip of bad news has been straining nerves for two months, ever since two Bear Stearns hedge funds began to implode on US sub-prime bets and new-fangled credit instruments- mostly collateralised debt obligations.
The Bear Stearns debacle led to a forced sale of assets, exposing the dirty secret that sub-prime and similar "Alt-A" mortgage debt is worth far less than its face value. In essence, $2,000bn (£1,000bn) in securities held by funds and banks may be falsely priced on the books. The rating agencies have since been scrambling to downgrade the bonds, raising fears of a cascade effect.
A lot of dominoes have already fallen hard. Australia's Macquarie said investors in two of its hedge funds may lose 25pc of their money, while Sowood Capital said it lost $1.5bn in July. Germany's Union Investment has frozen redemptions from an $1.1bn fund. In France, Oddo & Cie is closing three funds, while the insurance group Axa has closed two funds hit by the credit turmoil. Not to mention the closure of 110 US mortgage lenders since late 2006, capped by the bankruptcy of American Home Mortgage last week.
The flight from risk has frozen the issuance of junk bonds on both sides of the Atlantic, with the cost of borrowing for low and mid-tier firms jumping by 200 basis points in early June - if they can borrow at all. Investment bank are left struggling to find buyers for $470bn in debt left from leveraged buyouts and refinancing deals.
Mr Bloom said Europe and the US were responding to the crisis in different ways. "The markets have been crying out for money, and the ECB has chosen to give them all they want. The Federal Reserve is feeding out liquidity slowly. Ben Bernanke is making his stamp felt, and this may be a different kind of Fed from the Greenspan years," he said.
The concern is whether the world is facing a repeat of the Long Term Capital Management turmoil in 1998, but with less chance of a swift Fed bail-out this time.
"Investors can't decide whether we're looking at a fundamental crisis, or whether this is just a financial story, which is why we're seeing these violent swings every day. I suggest people get out of the market until things are clearer," he said.

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I teach Film, Media and English Lit.