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Is liquidation drying up?
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The unraveling U.S. subprime mortgage market is causing other markets to fray around the edges faster than anyone expected.As the Federal Reserve convenes for its latest meeting on Tuesday, the corporate credit markets are grinding to a halt. About $90 billion of bonds and nearly $250 billion of loans are still awaiting buyers, several high-profile hedge funds from the U.S. East Coast to Australia have failed, and a major U.S. mortgage lender this week closed its doors.
On Friday, shares in Bear Stearns Cos. dropped as much as 7.85 percent after credit rating agency Standard & Poor's lowered its outlook on the bank's debt to negative, citing problems at Bear's managed hedge funds.
In a conference call, Bear Stearns Chief Financial Officer Samuel Molinaro said: "It's as been as bad as I've seen it in 22 years. The fixed income market environment we've seen in the last eight weeks has been pretty extreme.
His comments on Friday helped cause the biggest one day fall in the benchmark S&P 500 stock index since February 27.The volatility in global financial markets this month resulting from rising default rates on U.S. subprime mortgages has led to a risk reappraisal across credit and stock markets, which some say can be seen as good news for the Fed as it cools a takeover boom fuelled by excessive global liquidity.
Further intensification of financial stress will likely push the Fed to take actionHit particularly hard by the drying up of liquidity and rising risk aversion are investment banks and brokerage firms which have been left to underwrite takeover deals already announced.
PAIN SPREADING BEYOND BEAR
Two Bear Stearns hedge funds collapsed last month and this week the investment bank blocked investors from withdrawing money out of a third fund as losses in the credit markets expand beyond securities related to subprime mortgages.
But Bear Stearns had some company this week.
Macquarie Bank Ltd., Australia's largest securities firm, said investors in two hedge funds may lose up to 25 percent of their money, blaming fall-out from the U.S. subprime mortgage crisis.
On Tuesday this week American Home Mortgage Investment Corp (which focused on borrowers with decent credit scores, said lenders had cut off its access to credit and that it might have to liquidate its assets. By the end of the week it had closed its doors.
FED TO THE RESCUE?
The fallout from the U.S. subprime crisis continues to inflict damage, the ensuing rout in the marketplace has been frightening, and there is growing concern over whether the crisis will widen and threaten the entire U.S. banking system's stability.From my point of view,this can not be the case.I still believe the sub prime issue is largely contained however not the hedge funds.Therefore it is a necessary act to control the liquidity however the economy is pretty good and there is no credit crunch for the ones that have the quality for it.
The appetite for risk-taking has diminished considerably. In less than two months, risk premiums on high-yield bonds have jumped 177 basis points higher from their historic low of 241 basis points over Treasuries on June 5, according to the Merrill Lynch Master II High-Yield Index.The Fed historically acts quickly to ease policy whenever the banking system's ability is threatened.
Financial markets have another view: the futures markets were pricing in a 95 percent chance of a Fed interest rate cut as soon as October, up from a 16 percent probability of a rate cut just two weeks ago. |
| Tarih
: 06.08.2007 |
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Copyright
© 2006 Mert TOKER All Rights Reserved. |
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