Countdown to a crisis

Friday August 10, 2007
Guardian Unlimited

February 8

HSBC issues first profit warning as bad debt provision from UK mortgage lending spirals

March 13

Dow Jones Industrial Average falls 242 points after rise in mortgage arrears and home repossessions in US

April 2

US lender New Century Financial files for bankruptcy after increase in bad loans

May 4

Dillon Read, hedge fund run by Swiss bank UBS, closes after losing £62m on sub-prime

June 23

Bear Stearns says two hedge funds with billions invested in sub-prime market are in trouble

June 29

Caliber Global Investment, hedge fund run by UK's Cambridge Place, sells assets after £4.4m losses on sub-prime

July 18

US Federal Reserve chairman Ben Bernanke warns of debt contagion from sub-prime lenders

July 23

AXA Investment Managers closes £460m sub-prime related fund to new investors.

July 26

Alliance Boots and Chrysler fail to find buyers for £10bn of debt to fund buyouts

July 27

Cadbury delays sale of its US drinks division blaming turmoil in credit markets

July 30

German lender IKB issues profits warning linked to sub-prime lending. CEO quits

August 1

German banks bail out IKB bank for £2.4bn. In Australia, Macquarie Bank says two of its funds face losses of 25%

August 2

Mitchells & Butler's £4.5bn property spin off delayed by credit turmoil

August 6

Bear Stearns co-president Warren Spector ousted over bad debt fiasco

August 7

£23bn sale of Virgin Media in doubt. US lender American Home Mortgage goes bust

August 9

BNP Paribas suspends three funds. ECB opens emergency funds to ease credit crunch

Markets go red as contagion spreads

Europe's central bank releases £64bn emergency funds as US bad debt crisis takes hold around the globe

David Teather and Andrew Clark in New York
Friday August 10, 2007
The Guardian

Central banks on both sides of the Atlantic pumped billions into the financial system to calm nerves over an impending credit crunch yesterday - but their actions only served to heighten alarm, leading to a fresh plunge in global share prices.
The European Central Bank injected an emergency €95bn (£64.5bn) into the markets, in its first intervention since the turmoil triggered by the 9/11 terrorist attacks on New York and Washington DC in 2001.

In America, the Federal Reserve added $24bn in temporary reserves to the US banking system to shore up liquidity and bring down short-term interest rates, while the Bank of Canada mounted a similar operation.
The moves, however, seemed to fuel a sense of crisis over defaults in America's mortgage lending industry, which are causing a ripple effect through the banking industry as much of the debt is bundled up and sold on.

On Wall Street, blue-chip shares had their worst day in four months as the Dow Jones Industrial Average dropped by 387 points to 13,270. Stock prices swung wildly, and trading volumes hit an all-time record with 2.8bn shares changing hands. Of the Dow's 30 component stocks, 29 ended the day lower.

Bourses across Europe fell, with the FTSE 100 in London finishing down 122.7 at 6271.2. The nervousness spread to all assets that appeared risky, including commodities.

The fresh sell-off was sparked by an announcement from the French bank BNP Paribas that it had blocked withdrawals from three investment funds worth €2bn because of the "complete evaporation" of liquidity. A spokesman for the bank described it as a technical issue, and said he hoped it would be a temporary situation.

There were also reports that the US bank Goldman Sachs has suffered losses in two of its hedge funds. Goldman is said to have sold down positions at its North American Equity Opportunities and Global Alpha funds, both of which rely on computer models rumoured to have struggled with recent volatility.

Nick Parsons, head of markets strategy at nabCapital, said that one of reason investors were so nervous was the sheer complexity of contemporary financial markets with the growth of instruments such as securitisation and credit derivatives.

"The problem for the markets is they don't know where this is heading. It is like walking blindfold through a minefield. There is no way of knowing who owns this stuff. But what is clear is that this is not just a US problem. This debt is owned by a huge variety of institutions, some you've heard of, some you've never heard of, and some you are probably going to hear of soon."

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FAQ: What's shaking the markets

Why are financial markets in a panic?

Investors are worried that fallout from the credit crunch in the US is much more widespread than feared. So they dumped risky assets yesterday, causing sharp market falls.

What has caused the credit crunch?

Many US mortgage holders on low incomes have been unable to meet their loan repayments, their homes have been repossessed, and banks are having to write off sub-prime loans.

Why has this affected Europe?

Many banks in the US and Europe have bought these sub-prime loans, often packaged in pools of debt.

Why is this a problem?

These debt pools are worth a lot less than banks paid for them and are very difficult to sell. Some banks have been forced to close funds that were exposed to these loans and the US sub-prime sector.

Why are central banks worried?

Central bankers are concerned about a squeeze on the amount of cash in the financial system. This is because when investors are worried about risky markets, they want to hold high proportions of cash.

What were central banks doing yesterday?

Banks led by the European Central Bank were making large amounts of cash available to commercial banks.

Did the Bank of England do anything?

No. Mervyn King, governor of the Bank, said on Wednesday the turmoil in credit markets was a long way from being an international financial crisis.

Did the central banks' money calm markets?

It is too soon to say. Investors were glad central banks have acted. But sometimes when bankers show concern it makes markets even more panicky.

called the Fed to demand cheaper interest rates. And China calls for higher rates.

Rock, hard place. Sword and the wall.

I did inhale.

SPIEGEL ONLINE - August 10, 2007, 11:18 AM
URL: http://www.spiegel.de/international/business/0,1518,499160,00.html

BAD DEBTS
American Mortgage Crisis Rattles German Banking Sector

By Frank Hornig, Lothar Pauly and Christian Reiermann

Germany has bailed out one bank burdened with American "subprime" mortgage risks, but the fun may not be over -- as the earthquake in world markets this week demonstrates.

Cheap deals on American home loans are haunting investment banks in Europe. Average housing prices are falling across the United States, "for the first time since the 1930s."
Getty Images

Cheap deals on American home loans are haunting investment banks in Europe. Average housing prices are falling across the United States, "for the first time since the 1930s."

The saviors of the German financial sector came together early this month in a sterile conference room at the Düsseldorf headquarters of the IKB commercial bank. The head of Germany's state development bank KfW, Ingrid Matthäus-Maier, looked anxious. Jörg Asmussen, a departmental head at the Finance Ministry, wrung his hands. His boss, Finance Minister Peer Steinbrück, called from his home in Bonn; other top leaders of German banks were also listening in.

Germany had been hit by a version of the crisis that surprised French investors on Thursday, sending stock markets from New York to Tokyo into unexpected dives. Debts arising from America's so-called subprime mortgage sector had just caused IKB to falter.

The most thankless job fell to Matthäus-Maier. She had to tell those in attendance that KfW's stake in IKB was in an unforeseen predicament. The niche bank specializes in the rather dull sector of financing mid-sized companies; but recently it had taken on risky investments in the United States. The bank's management made some bad bets, and lost. Now it was teetering on the edge of insolvency, unless other German financial institutions chipped in with emergency funding.

Jochen Sanio, president of Germany's banking supervisory agency BaFin, was pessimistic: If IKB folded, the failure might spread to other institutions, and maybe set off the biggest bank crisis since the Great Depression in the 1930s. Bundesbank President Axel Weber was less bleak, but made another troubling prediction: A chain reaction could endanger Germany's banking reputation. The gathering of bankers and government officials decided to undertake the biggest rescue operation for a single bank that Germany has ever seen.

American Dreams Gone Sour

The epicenter of this financial quake is the United States. Hardly a day passes now when an American mortgage lender or hedge fund doesn't go belly-up. The world's equity markets first plunged in response to the crisis in mid-July. Germany's leading stock index, the Dax, lost over ten percent in a matter of days, and America's Dow Jones dropped six percent.

Another round of panic hit world markets this week after a French bank, BNP Paribas, had to freeze three investment funds worth €2.76 billion ($3.79 billion) because of American mortgage debts. The Down Jones fell three percent on Thursday, and central banks in the US, Europe and Japan have injected money markets with billions of dollars to ease credit jitters.

The crisis has even started to frighten US consumers, whose joy in spending has until recently the bedrock of the world economy. They're not just victims in this story, but also the cause of the mess. They've built and bought big new houses on easy credit without thinking about potential consequences. This was not a problem as long as real estate values climbed, allowing them to take out ever-larger housing equity loans. But the overheated US housing market started to crash this year, putting an end to the carefree days of American homeownership.

Rising house prices in America started a craze for "subprime" mortgages, or housing loans offered to homebuyers below the prime lending rate. Typically these loans involve a low-rate grace period before a higher rate comes into effect. And as long as housing prices boomed, debts associated with these mortgages could be packaged as attractive investment vehicles for big institutions. But now the market has stalled and abundant credit for such risky investments has dried up -- and anyone, apparently, can run into trouble.

One Bank's Quick Decline

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Three economists on NPR Diane Rehm yesterday responded to a callers question about a comparison with the S&L rip off of the late '80 by saying that...Oh no, hedge funds are private enterprise ...the government has no obligation to bail them out(paraphrasing).
Ah, the delusions of worshipping at the the shrine of the Free Market.
Stirling is right, the Decade of Stupidity. Dumber than dirt or a box of rocks.
I read somewhere that Americans love to have their financial crashes in autumn.

It would be interesting to put into the timeline comments from certain people about the morgage problem is fully contained. Seems like I heard that a lot all down the line.