The Credit Crisis - why finance houses are insuring
The article below demonstrates, the real reason that big finance houses are taking up insurance and hedges against market devaluation. It is also worth noting that the financial models underpinning the New capital Accord are all in a state of failure right now. This has led to a massive loss of internal confidence within the financial institutions themselves, which they are trying to keep secret. However the 'proof of the pudding is in the eating'; the fact that they are too frightened to even lend to each other (interbank lending) is proof positive of internal fear.
Note that even Freddie Mac has posted a US$320 million loss over just 3 months. This crisis is exhibiting serious contagion.
Article as follows:
Leading lender likens US credit crisis to Great Depression
Andrew Clark in New York
Friday August 31, 2007
The Guardian
The US financial industry displayed fresh signs of distress from the credit crunch afflicting global money markets yesterday, with one mortgage provider describing lending conditions as the worst since the Great Depression of the 1930s.
Leading accountancy firm H&R Block revealed huge losses at its up-for-sale mortgage arm, Option One, and said it was considering a halt on new loans. Reporting a quarterly loss of $302m (£150m), Mark Ernst, chief executive, said: "The loan originations market is in the midst of the most severe dislocation it has seen in years, maybe the most severe since the 1930s."
During early trading, the Dow Jones industrial average slipped by 104 points, taking it 750 below its record high set in mid-July. The Federal Reserve injected $10bn of liquidity into the banking system and by lunchtime in New York the blue-chip index had pared back its losses and was down only 16 at 13,272.
Freddie Mac, the US government-sponsored mortgage aggregator that buys loans and repackages them as securities to keep costs down for low-income households, revealed that it had taken a $320m hit on credit losses in the three months to June.
Standard & Poor's, the credit rating agency, predicted more pain in coming months for investment banks, which, it said, could see their banking and trading profits fall by as much as 70%. In a research note, S&P's credit analyst, Nick Hill, said revenue for Wall Street institutions could be down by as much as 47% - worse than the 31% drop in the second half of 1998, when the markets were hit by an economic collapse in Asia and a currency devaluation by Russia.
"There is a common theme between the two years," he said. "The source of the problem has shifted from emerging markets to the world's most developed economy."
An Australian hedge fund that has lost as much as 80% of its value during the month's market turbulence threw in the towel yesterday. Basis Capital declared bankruptcy for its A$100m (£40m) Yield Alpha Fund and applied to courts in London and New York for protection from creditors. Steve Akers, of liquidators Grant Thornton, said investments included forays into Britain and the US. "We believe there are assets in those two jurisdictions which need to be protected," he said.
The power of hedge funds in global markets was underlined by a study showing that they are responsible for 30% of all bond trading in the US - double their share a year ago. Greenwich Associates, the consultancy that carried out the research, said hedge funds are no longer an "important part" of the market for fixed-income products - they are the market.
Article link:
http://www.guardian.co.uk/usa/story/0,,2159716,00.html?gusrc=rss&feed=12
