Debt Rattle, March 20 2008: It's spring!

Ilargi: Oh irony... 3 days ago, we reported that James Turk calculated Citi’s leverage at 41.6 times, while Meredith Whitney expects its stock to lose 50% of its value soon.

The Great Unwind has begun, Citigroup warns

The Great Unwind has begun, Citigroup Inc. strategists warned on Wednesday. As markets and economies de-leverage across the globe, investors should avoid companies and countries that have grown to rely too much on borrowed money, they said. That means favoring public-equity markets over hedge funds, private-equity and real estate, while leaning toward emerging market countries and away from developed nations like the U.S., the bank's global equity strategy team advised.

Within equity markets, the financial-services should be avoided because it's still over-leveraged, while other companies have stronger balance sheets, the strategists said. "Steady growth, low inflation and rock-bottom interest rates encouraged economic and financial participants across the world economy to gear up over the past few years," Robert Buckland and his colleagues on Citi's global strategy team wrote in a note to clients. "Easy money encouraged many to buy a bigger house, a bigger car or a bigger speculative position."

"But now, any behavior that relied upon continued access to easy money is being dramatically reassessed," they added. "Leveraged banks must lend less, leveraged consumers must consume less, leveraged companies must acquire or invest less, and leveraged speculators must speculate less."

Financial-services companies are the most vulnerable to this reduction of borrowed money across the globe, they said. During the last credit crisis in 1998, European banks were leveraged 26 to 1. In the early part of this decade, leverage grew to 32 to 1. Now the sector is geared 40 to 1 on average, according to Citi's European bank research team.

"The banks have a long way to go," the strategists said. "We would continue to avoid the sector while they are de-leveraging." Other companies are in much better shape, having rebuilt cash from strong earnings since 2003. Emerging market companies have developed particularly strong balance sheets, having learnt hard lessons from the Asian financial crisis a decade ago. However, even though some companies may not have much debt themselves, they may be exposed to over-leveraged customers or highly leveraged investors, Citigroup warned.

Automakers, home builders and electronics retailers benefited as customers borrowed money cheaply in recent years to buy cars, houses and flat-screen TVs. That attractive financing is now being withdrawn. "There will be plenty of companies that have strong balance sheets, so may not be most immediately vulnerable to the credit crunch," Citi said. "But they may find that their leveraged customers are vulnerable."

The difference, or spread, between interest rates on investment-grade corporate bonds and Treasury bonds has jumped in recent months, even though most companies aren't very leveraged. This widening may be caused by leveraged investors such as hedge funds having to sell good quality assets to meet margin calls, or requests for more cash or collateral.

---

Wall Street rallies to aid Lehman

Wall Street's leading investment banks have rallied around ailing rival Lehman Brothers after the Federal Reserve Bank of New York urged them to support the institution in order to try and preserve financial stability. It is understood the New York Fed contacted key executives at a number of leading banks, including Goldman Sachs, Citigroup and Morgan Stanley, to discuss Lehman's situation over the weekend.

By yesterday morning, the banks' prime brokerage departments - which service hedge fund clients - were under strict instructions not to do or say anything in the market that could damage Lehman. The intervention is important because Wall Street fears a repeat of the events which led to the weekend's rescue of Bear Stearns. The bank was fatally damaged when hedge funds closed out their positions, demanding immediate repayment of the cash.

One American banker said: "[We heard] from the top, 'Do not encourage calls to Lehman clients. We want to run that up the flagpole. We don't want another run on a bank.' " As a result, it is believed that bankers were told not to solicit Lehman's clients for business or to give the impression the bank is uncreditworthy.

Lehman's business model is closest to that of Bear Stearns, and there has been considerable speculation surrounding the state of its balance sheet. A spokesman from Lehman Bros declined to comment. The other banks involved in the calls also declined to comment.

A spokesman for the New York Fed said: "We never talk about private discussions between the Federal Reserve and commercial banks." According to a source close to one of the banks, the Wall Street club remains very supportive of Lehman and is wary of doing something that might harm the bank's financial position.

Lehman chief executive Dick Fuld yesterday moved to calm concerns in the market, saying that the Federal Reserve's decision on Sunday to make secured loans to investment banks should ease fears. He said that from his perspective the creation of a liquidity facility for primary dealers "takes the liquidity issue for the entire industry off the table".

In addition to the liquidity facility, the Fed also reduced the discount rate at which banks borrow money from 3.5pc to 3.25pc, ahead of today's Federal Open Markets Committee meeting at which the main base rate is expected to be cut by at least 0.75pc. In spite of his reassurances, Lehman's shares, which are now trading at their lowest level since 2003, fell as much as 46pc at one stage to recover to close down $8.82, or 22.5pc, at $30.44.

---

Gold crashes as investors bail out

Investors scrambled to liquidate risky positions across the board last night in a renewed flight to safety, setting off a biggest one-day fall in gold for a quarter of a century and a slide in currencies and stock markets. On Wall Street the Dow Jones Industrial Average tumbled 293 points to 12099.7 on fears that the Federal Reserve's dramatic rescue moves over recent days may not be enough to stabilise the financial crisis.

On the New York Mercantile Exchange, crude oil tumbled $6 to $103.42 a barrel - the biggest fall since December 2004 - on mounting fears of a global economic slowdown. Gold crashed $42 to $943.50 an ounce. Wheat futures plunged by 7.7pc in Chicago. "A major commodities correction is under way," said James Steel, a strategist at HSBC. Stephen Jen, a currency strategist at Morgan Stanley, said the markets were now flashing warnings of "severe risk aversion" comparable to the panic last August.

The move by hedge funds and banks to unwind large speculative trade even triggered a correction in the euro. The currency fell to $1.5580 against the dollar as speculators closed bets after a dizzying rally to record highs this year. The fall in sterling was even more marked, losing almost four cents to slump below $2 to $1.986.

The severity of the moves in a range of markets suggested that funds were closing their most profitable trades in a scramble to raise liquidity. Automatic stop losses were triggered as commodities crashed through support levels, setting off a downward spiral. Meanwhile, a report on US energy needs showed that the country's total implied fuel demand averaged 20.3m barrels a day in the past four weeks - down 3.2pc from last year.

Phil Flynn, senior trader at Alaron Trading in Chicago, said: "The commodity bubble is bursting. There's a sense that the Fed created this bubble and by cutting rates less than forecast it is deflating it. There is demand destruction occurring and it's going to be hard to prop up oil prices."

---

Oil drop biggest in 17 years

Oil prices experienced the sharpest plunge in 17 years on Wednesday, driven down by weakening demand and a stronger dollar. U.S. light crude for April delivery fell $4.94 a barrel to settle at $104.48 on the New York Mercantile Exchange.

The drop in oil was the largest single-day slide in dollar terms since Jan. 17, 1991, when oil fell by a third, or $10.56, after the United States launched an attack against Iraq to begin the first Gulf War. In percentage terms, oil fell 4.51% on Wednesday - the biggest drop by that measure since August.

On Wednesday, oil started the day trading lower after the Federal Reserve cut its key lending rate by 3/4 of a percentage point a day earlier. The cut was less than the full point expected by some investors, sparking a rally in the dollar and weighing on dollar-traded commodities such as oil. "As the dollar strengthens, oil prices in non-dollar-denominated terms become more expensive," giving traders incentive to sell, said Stephen Schork, publisher of the Schork Report, an oil industry newsletter.

The other factor pushing oil lower on Wednesday was the release of the U.S. Energy Information Administration's weekly report. The report showed that demand for motor gasoline fell 0.1% last week, to about 9.1 million barrels a day, compared to the same period a year earlier. The decline in demand comes as average gas prices remain close to their record high levels, according to a survey released by AAA, a motorist advocacy group

---

Fannie, Freddie Freedom Is Policy Shift

By making it easier for Fannie Mae and Freddie Mac to raise funds and back nearly $2 trillion in home loans this year, the government is making its role in steadying the economy decidedly more hands on.

That strategy is moving the Bush administration toward activist government solutions and away from its traditional free-market leanings. Behind the push: a housing crisis and credit-market calamity that have spread fear through global financial markets and made it tough for consumers and businesses to borrow.

Analysts worry that the opening for Fannie and Freddie could put too much financial risk on the backs of the mortgage-finance companies, which have taken multibillion-dollar hits from the foreclosure wave and have been hungry for capital.[..]

Key congressional Democrats hope to find a more receptive audience among administration officials when they return from Easter recess with their own rescue plans. They want the government to guarantee up to $300 billion in refinanced mortgages, in return for agreements from investors to take a loss on the loans.[..]

"Is the man on the street going to see much difference? No," said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication based in Bethesda, Md. "But it is going to help restore confidence in the mortgage-security market." Fannie and Freddie are the two biggest players in that market, together holding or guaranteeing around $4.9 trillion in home-loan debt.

As the mortgage crisis and ensuing credit crunch have worsened, policy makers have increasingly looked to them to step up their participation in the hobbled market for securities backed by mortgages. Some analysts see a danger, though, that the companies will become saddled with excessive risk, endangering the global financial system if they were to totter or fail. While the Treasury Department isn't obligated to assist Fannie or Freddie in a financial emergency, there is a perceived notion on Wall Street that the government would bail them out if there is a collapse.

"The government is encouraging Fannie Mae and Freddie Mac to throw caution to the wind and take even bigger risks with taxpayer money," said Peter Schiff, president of Euro Pacific Capital in Darien, Conn. "In truth, both Fannie and Freddie are already in a more precarious position than politicians or investors would like to admit."

---

Ilargi: Even though it’s hardly mentioned at all: just as I predicted last week, the government doesn’t only use Fannie and Freddie to prop up mortgages. Here’s the first indication of the Federal Home Loan Bank System (FHLB) and the Federal Housing Administration (FHA) taking on a lot more risk.

Mortgage lenders to pump $650 billion(?!) into markets

Two U.S. home financing heavyweights won government approval on Wednesday to pump $200 billion more into troubled U.S. mortgage markets, the latest step to stabilize credit markets and avert a deep recession.

Despite intensive efforts to battle rising home foreclosures and calm shaky markets by the Treasury Department and the Fed, which has pledged $400 billion to free up credit, Democratic lawmakers continue to press for bolder action. "All hands are on deck to try and prevent this U.S. situation from becoming a dire crisis," said David Watt, a currency strategist with RBC Capital Markets in Toronto. "They're doing everything they can, making policy on the fly."

Still, markets were not calmed by the latest move by the regulator that oversees Fannie Mae and Freddie Mac to immediately loosen their capital requirements and give them a bigger role in buying up mortgages. The blue chip Dow Jones industrial average lost almost three-quarters of the 420-point gain notched a day earlier, closing down 293 points, in part on worry brokerage Merrill Lynch & Co may need to write down more bad assets.

More relief, however, is in the works. A separate regulator appeared near a decision to allow the Federal Home Loan Bank System to double some mortgage holdings to around $300 billion -- which would be another big shot of market liquidity. Sources familiar with the proposal said a vote on the measure was likely this week.

Rep. Barney Frank, chairman of the powerful U.S. House of Representatives' Financial Services Committee, said the Bush administration was warming to his plan to use the Federal Housing Administration to insure up to $300 billion of shaky home loans for lenders willing to erase some of the debt. The Treasury, however, said it had "no interest" in the proposal, although it was willing to listen to any new ideas.

---

Ilargi: The article below is a bit long, I know, but it’s so good I don’t see where to cut it. The fact that Fannie and Freddie hold 10% of all outstanding interest rate swaps should get much more attention. I can’t even begin to calculate how many trillions that must be. $50 trillion? And I’m convinced that risk is very close to being nationalized. Which effectively turns the entire US into a giant casino.

Forget the past and you make the same mistakes again

The institutional memory of governments and the financial industry now has the lifespan of a fruit fly. In the past, the lessons of history have been forgotten because a generation of managers and policy people retired, taking with them their essential historical experience. Thanks to modern management techniques and high technology, though, we can now achieve near- complete amnesia in a year or two.

In the case of the US government sponsored enterprises, the biggest of which are Fannie Mae and Freddie Mac, for example, we are now about to get into the same mess we only crawled out of about three years ago. This time, though, given the present run of bad luck and fast-forwarding of the markets, a GSE-driven crisis could come a lot faster.

At the beginning of this decade, derivative risk management geeks, interest rate swaps traders and central bank econometricians filled up entire server farms with what-ifs on the balance-sheet hedging activities of the GSEs. The essential problem was that the GSEs were balancing ever-larger portfolios of fixed-rate mortgages on tiny equity bases. Fortunately, as we all knew, the credit risks of those portfolios were limited because homeowners rarely default on their mortgages. But that still left very large interest rate risks.

The core problem for the housing GSEs is, and has been, the prepayment option embedded in US fixed-rate mortgages. That has meant that the term of the GSE assets extends or contracts depending on whether homeowners can refinance at an advantageous rate. However, most of the long-term debt on the liability side of the GSE balance sheets has a fixed term. So the GSEs must more or less continually offset this imbalance between the average maturity of their assets and liabilities through the derivatives market, specifically the interest rate swap market. Otherwise the mark-to-market losses would overwhelm their small equity bases.

This process of risk control on the part of the GSEs creates systemic risk for the fixed-income markets. GSE hedging tends to be pro-cyclical. As interest rates rise, the average term of the GSEs' assets extends, since homeowners are not refinancing. As rates fall, the average term contracts, as homeowners prepay the mortgages on the GSE books. So the hedging activities tend to accentuate market moves. As rates rise and bond prices fall the GSEs are, in effect, selling fixed-income derivatives into a falling market. As long as the derivatives books are small relative to the size of the market, that is not a big problem. When the GSE derivatives books got big, that was a problem.

By 2001 Fannie and Freddie together had more than 10 per cent of the total market in dollar-based interest rate derivatives. That concentration of risk was worrisome for the central banks. As we wrote at the time, they were concerned that the banks and brokers who were the counterparties for the GSEs would need back-up for these commitments from the Federal Reserve Board. Worse, from the point of view of the Fed, and Alan Greenspan in particular, the GSEs' management had financial incentives to continue to expand their books of business. They had the political clout, since expanding the number of homeowners had strong support across party lines in Congress.

Then Mr Greenspan, the GSE regulators and their geeky allies got lucky. A management compensation scandal broke at the GSEs that quickly turned into a more general accounting scandal. The reformers had the political wind at their back, and as the accountants and lawyers sifted through the books, the portfolio growth reversed. Even better from a systemic stability point of view, the GSEs' share of the interest rate derivatives markets dropped by more than two-thirds by 2005. As homeowners took on more adjustable rate mortgages, they assumed some of the rate risk the GSEs shed.

Unfortunately, the squeezed balloon of mortgage credit just bulged out elsewhere. The GSEs, and the rest of the financial markets, assumed more credit risk, and they are now incurring those very real losses. This recent history seems to have been forgotten by the government and the financial institutions.

The caps on GSE portfolio growth have been lifted, and Congress and the markets are now asking them to take on the mortgage assets that everyone else wants to sell. Hank Paulson, Treasury secretary, has strongly suggested they prepare for this by raising capital. Freddie Mac's chief executive has already said he does not want to.

If this balance sheet growth does happen, the GSEs will be back to assuming the same rate risks that were so alarming four or five years ago, only bigger. And they will be attempting to hedge their rate risks using counterparties that are far more capital constrained than before. I believe it more likely that before we get to that point again, the GSEs will be formally nationalised. The Bush administration is just kicking the can a little further down the road.

These "public-private" mutants will simply become public agencies. There is no way to raise the equity capital for them to remain halfway in the private sector. In any event, the foreign central banks and related institutions have made clear to the US government that it will be held responsible for the GSEs' debt.

---

Alt-A Delinquencies Continue to Rise

Delinquencies on alt-A mortgages pooled into securities between 2005 and 2007 continue to rise, Standard & Poor's said in a report released Wednesday. Mortgage-backed securities are pools of mortgages combined and sold to investors. Alt-A mortgages are loans given to customers with minor credit problems or who do not have enough documentation to receive a traditional, prime loan.

For securities rated by S&P in 2005, 11.7 percent of current outstanding balances were delinquent in February, a 6.4 percent increase from the previous month. About 15.9 percent of securities rated in 2006 were delinquent in February, a 9.7 percent increase from January. Delinquencies for securities rated in 2007 increased 14.3 percent in February to about 10.2 percent.

S&P said seriously delinquent loans - loans at least 90 days past due, in foreclosure or homes owned by banks - continued to rise in February for all three vintages as well, with 2006 deals performing the worst. About 10 percent of 2006 loan volume was seriously delinquent at the end of February.

---

Hunt for subprime mess culprits as the blame game gets serious

Who can we blame for Wall Street's mortgage and banking crisis the nightmare that has seen around €2 trillion wiped off the value of American homes in the past two years? Who can the one family in every 30 in Stockton, California, blame for losing their home? And to whom should Bear Stearns's shareholders direct their anger after Wall Street's fifth-biggest bank almost went bankrupt on Thursday afternoon?

The culpable are spread across the whole gamut of America's political, economic and banking infrastructure. They trickle down from Capitol Hill with the policies devised at Washington's Federal Reserve Bank and head up the coast to Manhattan's Wall Street chief executives.

Downstairs from the chairman's office lie more culprits populating investment bank trading floors, and the maths graduates in front of their Excel spreadsheets, designing ever more complex-structured debt products.
The blameworthy also sit in the credit rating agencies who endorsed the debt and extend wide across America to the network of thousands of mortgage brokers and lenders who sold bad mortgages over the past decade.

Sitting at the top of the blame tree, many look to Alan Greenspan, the former Chairman of the Federal Reserve, America's central bank. Under Mr Greenspan's leadership, the Fed continued to cut interest rates during the 1990s -- the cheap cost of borrowing helped inflate the housing market, with some states such as Florida and California experiencing doubling house prices over a five-year period.

Cheap money and surging house prices also created fertile ground for mortgage brokers to push home loans that borrowers could ill-afford, in the hope that property values would continue to rise and homeowners could simply remortgage. Pushing the dream of universal home ownership, was former President Bill Clinton, whose policies helped encourage individuals whose low incomes and poor credit ratings should have prevented them from taking on mortgages at all.

Chris Whalen, founder of the Wall Street consultancy Institutional Risk Analytics, also blames Washington for the design of America's mortgage industry. He said: "The real father of sub-prime is Congress for setting up Fannie Mae and Freddie Mac. Their existence effectively meant that the Government had the monopoly on mortgages.

The banks had to scrabble around with what was left -- and what was left were jumbo loans [big mortgages] and bad credit quality debt." He explained: "Because of the way the market was structured, the likes of Bank of America and JP Morgan between 2004 and 2005 were so hungry for mortgage assets, they took market share from Fannie Mae and Freddie Mac."

---

Ilargi: There are two separate investigations regarding Bear Stearns.

SEC's Bear Stearns Probe Zeroes In on 'Put' Trades

Options to Sell Stock Spiked Before Fall; 'Very Unusual' Bets

The Securities and Exchange Commission is investigating the events leading up to the collapse of Bear Stearns Cos., specifically a surge in options contracts betting that the investment bank's share price would drop precipitously, according to people familiar with the matter.

The SEC inquiry focuses on a surge last week in "put" options that came days before the firm's proposed sale to J.P. Morgan Chase & Co. for stock now valued at about $278.5 million, or $2.32 a share, people familiar with the matter say. A put option allows the buyer of the option the right to sell a certain number of shares in the underlying company at a specific price within a set time.

For instance, if a trader bought a put option for Bear at $60, and the stock fell to $50, the trader could buy Bear stock in the market for $50 and have the right to sell it back to the option underwriter for $60 -- making a $10-a-share profit. The more a stock declines, the better off a put holder is.

The unusual trading in Bear's options began as early as March 7 and escalated through the following week, as rumors began swirling about Bear's liquidity and ability to stay in business. Alan Schwartz, Bear's chief executive, issued a statement March 10 stating that the firm's "balance sheet, liquidity and capital remain strong." March 12, just two days later, Mr. Schwartz made reassuring statements on CNBC.

Last week, the number of open put options leaped from 167,439 at the open of trading on Monday to 465,820 by the following Monday. That compares with open put contracts on Bear Stearns hovering around 155,000 the previous week. Last Thursday, the day before Bear received emergency funding from J.P. Morgan Chase and the Federal Reserve, some options traders gambled even more aggressively. They took on contracts that bet Bear's stock price would drop as low as $20 a share in the nine days until the contract expired March 20. Over the course of the trading day, 25,246 put option contracts at $20 a share were added.

The bets were particularly aggressive, since Bear's stock was trading above $50 until Friday morning, when the company announced the financial lifeline. Shares of Bear then plunged as low as $26.85 before closing Friday at $30. Those contracts are likely what caught the SEC's attention. "Betting on a 57% decrease in Bear Stearns stock in nine days is very unusual," said Todd Salamone, senior vice president of research at Schaeffer's Investment Research. There was a similar increase in put options that had a strike price of $30.

---

Bear Stearns Prepares To Lawyer Up

Bear Stearns insisted that nothing was wrong one day, only for everything to go wrong the next. Now, despite its insistence it was telling the truth throughout, the once-mighty Wall Street firm is readying itself for lawsuits.

In a filing with the Securities and Exchange Commission on Wednesday, Bear Stearns said it amended its bylaws to pay for potential lawsuits. The New York-based firm said the amendment allowed for costs, such as legal fees, to be paid or reimbursed by the company upon employee request.

The move comes as the SEC said it hadn't ruled out legal action over the comments Bear Stearns made about its financial health only days before the company's liquidity problems brought it to the brink of collapse and renewed jitters throughout the financial world.

As late as last Wednesday, Bear Stearns Chief Executive Alan Schwartz went on American television to confront doomsday rumors and reassure nervous investors that the firm had ample liquidity. He said he was "comfortable" that the brokerage would turn a profit in its fiscal first quarter. By Thursday, Bear Stearns' solvency was being called into question, and by Friday it told regulators it was ready to file for bankruptcy

---

Ilargi: Spin 'R 'Us. Fire sales of dead assets is now called: "reducing backlog". In reality, the banks took a 20% haircut for a loss of $6.8 billion.

Goldman, Lehman Reduce Loan Backlog With Discounts

U.S. banks from Goldman Sachs Group Inc. to Lehman Brothers Holdings Inc. have whittled their holdings of leveraged buyout loans to $129 billion from $163 billion at the beginning of the year by offering the debt at discounts, according to analysts at Bank of America Corp. The decline is a "ray of hope" for banks amid a slump in credit markets and a slowing economy, said analysts led by Jeffrey Rosenberg.

The firms also have $73.6 billion of high- yield bonds they need to sell, they said. Banks have been breaking ranks from their lending groups and offering their own pieces of the LBO loans at as little as 80 cents on the dollar to get the debt off their books. New York- based Lehman yesterday said it has reduced its LBO backlog by $6.1 billion to $17.8 billion since the beginning of the year. Goldman Sachs halved its holdings to $20 billion and Morgan Stanley reduced its pipeline by 20 percent.

The buyout industry, including Blackstone Group, Apollo Management LP and Kohlberg, Kravis Roberts & Co., all based in New York, negotiated more than $370 billion in financing to back acquisitions such as the $32 billion purchase of Texas power producer TXU Corp. and the $46.8 billion sale of Canadian telecommunications company BCE Inc. to an investor group led by the Ontario Teachers Pension Plan, the largest buyout ever.

---

Citigroup to Cut More Than 5% of Securities Employees

Citigroup Inc., the biggest U.S. bank by assets, plans to cut more than 5 percent of staff in the securities unit to rein back expenses after U.S. subprime- mortgage related losses. "Each year we identify the bottom 5 percent of performers in the institutional clients group, and some number of these people leave the firm," London-based spokesman Adam Castellani said in an interview today. "This year we will have a larger number of reductions as we continue to strengthen the business and lower our expense base."

Chief Executive Officer Vikram Pandit promoted former Morgan Stanley colleague John Havens this week to oversee the firm's trading, investment banking and hedge-fund units. The division posted a $4.6 billion loss last year, compared with a $8.4 billion profit, or almost 40 percent of the total, in 2006.

The New York-based company said in January it is cutting about 4,200 jobs and curbing year-end bonuses for top executives after $18.1 billion in writedowns on subprime home loans and bonds. The world's biggest financial firms have dismissed more than 30,000 workers in the last seven months and reported at least $195 billion in writedowns and losses.

---

ECB Lends Banks Extra Money Ahead of Easter Holiday

The European Central Bank lent extra money to banks today after the cost of borrowing euros overnight jumped before the Easter weekend. The bank loaned 15 billion euros ($23.2 billion) at a marginal rate of 4.13 percent. Forty-four bidders asked for a total of 65.8 billion euros, the Frankfurt-based central bank said in a statement. Banks will pay back the money on March 25.

The overnight rate remained at 4.2 percent today, the highest level since September. The ECB's benchmark interest rate is 4 percent. The cost of borrowing euros for three months climbed 1 basis point to 4.67 percent today, the highest this year.

"There was a feeling in the money market that the ECB's last seven-day refinancing tender didn't provide sufficient liquidity to endure the Easter holidays," said Ulrich Karrasch, a money- market trader at Unicredit Markets & Investment Banking in Munich. "The interbanking market still isn't functioning and markets are anxious due to the closing of the quarter." The ECB allotted 25 billion euros more than it said was needed in the past two regular weekly tenders. "I hoped the ECB would have given us at least two sentences to calm the markets, but they didn't," Karrasch said.

The Bank of England also acted today to address a squeeze in interbank lending after the U.S. Federal Reserve rescued New York- based investment bank Bear Stearns Cos. The central bank sold 5 billion pounds ($9.9 billion) of weekly money and will keep offering extra funds each week until the current monthly financing period ends in April. The offer replaces emergency loans made on March 17 that mature today.

Record defaults on loans to U.S. households with poor credit histories have caused a global credit squeeze for almost eight months. Subprime-related losses amount to about $230 billion, International Monetary Fund economist Anoop Singhsaid March 17.

---

IKB Issues Profit Warning, Trading Halted

Trading in shares of ailing IKB Deutsche Industriebank AG was halted Thursday after the company disclosed another profit warning and warned of more write-downs on its portfolios that would result in a loss of some $1.3 billion.

IKB has been wracked by losses from the U.S. subprime mortgage crisis since last year, reporting some 2.1 billion euros ($3.3 billion). On Thursday, the bank disclosed further projected losses, dealing a major setback to its biggest shareholder, KfW Bankengruppe, which has been trying to sell its 43 percent stake in the bank. There has been no significant interest. Adding more pressure to its outlook, IKB also said it doesn't anticipate posting any profit whatsoever in the coming years or, at the very least, a low profit. It did not provide any firm figures.

The bank has also put a temporary stop to plans sell off portfolio investments "due to the current market environment." IKB said the reevaluation of those assets would lead to the 800 million euros ($1.3 billion) loss in its current fiscal year, which ends March 31. Shares of IKB were down 2.5 percent to 4.93 euros ($7.74) before a trading halt was called by Deutsche Boerse, which oversees the German stock exchange.

---

Credit Suisse faces first-quarter loss

Credit Suisse warned Thursday that it may report a first-quarter loss due to deteriorating market conditions in March, as it also revised down its 2007 profit following a probe into traders who intentionally mispriced assets. The Swiss banking giant cut its bottom line for 2007 by 789 million Swiss francs ($799 million) to 7.76 billion francs following the investigation, which it first announced in February.

The group said it will take an overall write-down of 2.86 billion francs after revaluing the assets. Of those write-downs, 1.18 billion francs related to the fourth quarter, leading to the profit restatement, and 1.68 billion francs relate to the first quarter of 2008. Credit Suisse said the write-downs are around 200 million francs less than it had originally forecast.

"Including these valuation reductions, Credit Suisse was profitable through the end of February," the firm said in a statement. "However, in light of the difficult market conditions in March, at this time, Credit Suisse believes it is unlikely to be profitable in the first quarter," it added. Shares in the group slumped 9.9% in Swiss trading amid moderate declines across most European indexes.

---

James Cayne risks lawsuit as he seeks counter-offer for Bear Stearns

James Cayne, the chairman of Bear Stearns, is trying to elicit a counter-offer for the stricken investment bank in a move that could lead to him being sued for breach of contract. Mr Cayne and Joe Lewis, the Tottenham Hotspur investor who has a 9 per cent stake in Bear Stearns, are searching for a white-knight bidder to top the $276 million (£139 million) offer from JPMorgan Chase. They hope that even if a counter-offer is unsuccessful, it could force Jamie Dimon, chief executive of JPMorgan Chase, to raise his bid.

However, according to the terms of the tabled takeover agreement, no officer, director or employee is allowed to encourage an alternative transaction. Both Mr Cayne and Mr Lewis have lost more than $1 billion each after the near-collapse of Bear Stearns at the weekend. It is thought that Mr Cayne and Mr Lewis have contacted a number of banks and private equity firms, including Kohlberg Kravis Roberts and JC Flowers. They are also thought to have been in touch with Barclays, HSBC and Royal Bank of Scotland. All three declined to comment.

A counter-offer for Bear Stearns would face a series of hurdles. Part of the JPMorgan Chase offer, which values the bank at $2 a share, includes the financial support of the Federal Reserve Bank of New York, which has underwritten $30 billion of the most toxic of Bear Stearns’s investments. The New York Fed also extended special financing to JPMorgan that includes $6 billion to cover the cost of Bear Stearns redundancies and impending litigation. Any new bidder would have to convince the central bank that it should transfer its underwriting to support a new offer.

The existing takeover agreement also includes a clause that prevents Bear Stearns from accepting another deal until the JPMorgan Chase offer expires in March next year. In addition, Mr Dimon has an agreement that, should his offer be unsuccessful, he still has an option to buy the Bear Stearns headquarters, which are thought to be worth $1.1 billion. One financier at a US investment bank said: “If I was looking at a $2 offer, I would try and drum up another bid, but they have little chance.”

---

Bear Holder Lewis May Seek Alternative to JPMorgan

Billionaire investor Joseph Lewis, the largest shareholder of Bear Stearns Cos., said he may push the company to consider alternatives to the $339 million buyout offer from JPMorgan Chase & Co. Lewis will take "whatever action" he deems necessary to protect his $1.26 billion investment in New York-based Bear Stearns, he said in a filing yesterday with the U.S. Securities and Exchange Commission. He said he may "encourage" the firm and "third parties to consider other strategic transactions."

Lewis, 71, and Thunderstorm Capital's John Dorfman have threatened to oppose the JPMorgan purchase. The third-biggest U.S. bank agreed March 16 to buy Bear Stearns in an all-stock deal that values the securities firm at $2.32 a share, or $339 million, based on yesterday's closing price. Bear Stearns stock closed at $30 two days before the firm was forced to accept JPMorgan's terms or face bankruptcy after customers and lenders abandoned the broker because of concern about a cash shortage. The Federal Reserve agreed to provide as much as $30 billion to JPMorgan to get the deal done.

"If he gets others to vote with him he may be able to get some token increase in the price," said John Coffee, a securities law professor at Columbia University in New York, referring to Lewis. "He's not going to get a significantly higher bid because no one else can get the Fed's support and the Fed's financing."

Lewis paid an average of $103.89 apiece for his 12.14 million Bear Stearns shares, according to yesterday's filing. He started accumulating most of his shares last July and has lost about $1.19 billion on the investment, or almost half his wealth, which Forbes magazine estimated at $2.5 billion in its 2007 survey.

---

Volcker: Fed’s ‘Extreme’ Intervention ‘Raises Some Real Questions’

Former Federal Reserve Chairman Paul Volcker said on the Charlie Rose Show on Tuesday evening the Fed’s decision to lend money to Bear Stearns Cos. to keep it from collapsing is unprecedented and “raises some real questions” about whether that’s the appropriate role for the Fed.

Excerpts:
Volcker: We’ve seen the Federal Reserve take more extreme measures in some respects than any that have been taken in the past to deal with a financial crisis, which raises some real questions about not only for the Federal Reserve and its authorities, but for the structure of the financial system… The Federal Reserve is designed to lend to banks. And the banks were considered to be at the center of the financial system, and lend liquidity, provide cash in return for good assets, when a bank got in trouble.

Now they found in this case, where some of the investment houses were in trouble, and prototypically Bear Stearns … it’s lightly regulated by the SEC or some other, but not for the same reasons. They haven’t got the concern over the stability of those things….We’re going to lend to them and protect them, shouldn’t they be regulated?

Rose: Is it a wise precedent?
Volcker: Whether it’s wise or not depended upon how severe this crisis was and their judgment about the threat of demise of Bear Stearns. That’s a judgment they had to make and an understandable judgment. There is no question about it.

Rose: Could we have risked the failure of Bear Stearns?
Volcker: Well who knows? It would take a lot of courage. The Federal Reserve … has not, in the past, been conceived as a place where you put in bad assets, possibly bad assets. Lending institutions take risks. I’m not suggesting the assets are terrible, but they have collateral. But that is a new departure.

And at some point, the government ought to — in my view, the government ought to be taking responsibility for that kind of action, not the Federal Reserve, which is an independent agency designed to provide an ample supply of liquidity to the economy but not too much, protect against inflation, not to protect particular sectors of the economy from bad loans.

Rose: So the Federal Reserve should not be doing that, in your judgment. It’s not because it shouldn’t be done, it’s the role of the federal government.
Volcker: Absolutely. In this situation, they stepped in and nobody else was there to do it…They stepped into a vacuum, and I think quite appropriately, it’s a judgment they had to make. But is this what you want for the longstanding regulatory support system? My answer is no.

---

Jobless Claims Jump Sharply

The number of U.S. workers filing new claims for unemployment insurance increased sharply last week, matching a two-and-a-half-year high, suggesting another very weak employment report in March after back-to-back declines to start the year.

Continuing claims lasting longer than one week rose as well to their highest level since 2004, more evidence that the fallout from a housing slump, struggling automobile sector and strained financial markets is spreading throughout the economy.

Initial claims for jobless benefits jumped 22,000 to 378,000 after seasonal adjustments in the week ended March 15, the Labor Department said Thursday, matching the highest level since October 2005. Economists surveyed by Dow Jones Newswires expected an increase of only 3,000. The previous week's level was revised up by 3,000.

A Labor Department analyst said last week's claims were boosted by a strike at American Axel that has idled workers at General Motors plants in Ohio, Indiana and Michigan. The Labor Department didn't have a specific numeric breakdown. "It's in there, I know it's positive, but we're having trouble giving an accurate adjustment," the analyst said.

---

Dismal Year Is Forecast for Car Sales

The American auto industry is bracing for what may be its worst year in a decade. Several industry forecasters have sharply cut their projections for new-vehicle sales to less than 15.5 million this year, and abandoned rosy predictions for a rebound in the second half.

The gloomy outlook —reflecting credit turmoil, the housing crisis and the softening economy — will probably lead to more production cuts by car companies. But the good news for buyers is that they can expect better deals to draw them into the showroom.

The broader economic woes prompted the marketing firm J. D. Power & Associates to cut its annual forecast to 14.95 million vehicles, from 15.7 million — the lowest sales level since 1995. “The auto market is entering into a true recessionary phase, which is something we have not seen in the last 10 years,” said Bob Schnorbus, the firm’s chief economist.

The industry has been selling at an annualized rate of 15.2 million vehicles through the first three months of the year, but appears headed for an even worse spring season. Moreover, analysts are now hedging predictions for a stronger second half of the year, despite the Federal Reserve’s move on Tuesday to cut interest rates to stabilize the financial markets. With consumers short of cash and deep in debt, many prospective buyers are finding it difficult to secure financing for a new car.

Automotive finance companies are fearful of repeating the mistakes of subprime lenders in the housing industry and are generally declining to make risky vehicle loans. “We are faced with the dilemma of lowering our credit standards to put them in a car, or saying no,” said Michael J. Jackson, chairman of AutoNation, the largest auto retailer in the United States. “And we’re telling them no.”

---

The Great Credit Ratings Cover-Up

A recent Bloomberg article details how the nation’s largest credit rating agencies have turned a blind eye to deteriorating credit-worthiness in Wall Street issued asset-backed securities.

“Even after downgrading almost 10,000 sub-prime-mortgage bonds, Standard & Poor’s and Moody’s Investors Service haven’t cut the ones that matter most: AAA securities that are the mainstays of bank and insurance company investments.” In fact, an estimated US$120 billion in sub-prime bonds - still rated AAA by the agencies - DO NOT meet the standard for such top ratings.
In fact, some of this AAA-rated debt has fallen as low as 61-cents on the dollar amid record home foreclosures and sky-rocketing default rates among similar bonds. According to one hedge fund manager interviewed by Bloomberg, “Downgrades of AAA and AA bonds are imminent, and they’re going to be significant.”

A look inside one of these bonds tells a frightening tale. A US$80 billion sub-prime asset-backed bond issued by Deutsche Bank in 2005 is still rated AAA by S&P and Moody’s. Yet, 18% of the mortgage loans in the security are in foreclosure. Additionally, lenders have already seized 15% of the properties underlying the loan values for this security. Another 10% have been delinquent for more than 90-days.

Another Morgan Stanley Capital sub-prime mortgage-backed security has credit support of 64% relative to the number of delinquent mortgages loans in the pool. But the credit should be at least twice the delinquent mortgages to maintain a top rating. Technically, much of this so-called triple-A rated debt should have been downgraded long ago. So why hasn’t it? The simple answer is: Fear of too much “collateral damage.”

According to Bloomberg, “Financial firms own high-grade collateralized debt obligations, which package securities such as mortgage bonds and slice them into pieces with varying risk. As the underlying mortgage bonds are downgraded, those securities will also lose their ratings and tumble in value.”

There’s a huge potential “contagion” effect that would ripple through the financial system if Moody’s or Standard and Poor’s dared to downgrade these shaky sub-prime credits across the board. For instance, a bank holding US$100 million of AAA-rated sub-prime bonds needs just US$1.6 million in capital backing such a highly rated credit. - that’s a lot of leverage. And such leverage is fine, as long as the bonds remain triple-A rated.

Should the bonds get downgraded to below investment grade however, under global accounting rules, a bank must put up additional capital. In fact, it would take US$16 million in capital to back US$100 million in non-investment grade bonds. That’s 10 times as much capital required in the event of a credit ratings downgrade. Wall Street just doesn’t have that kind of extra capital lying around. Bear Stearns found this out the hard way over the weekend.

That’s why I expect the major ratings agencies, perhaps abetted by the Treasury Department and the Fed, to continue covering-up the true health of US$650 billion in outstanding sub-prime bonds. Should these ratings get cut now, the consequences might be unimaginably bad for Wall Street.

At the risk of sounding like an alarmist, I just have one question. What happens to confidence in the U.S. financial system (not to mention the dollar) when people wake up and realize these fairy tale markets (held up by fantasy ratings) turn into a nightmare? The Fed is merely monetizing Wall Street’s mistakes yet again, while leaving future generations of taxpayers with an even bigger tab to settle, and higher future inflation to fight.

But there’s just no time for such ponderings now, we’re in the midst of a full-blown financial crisis after all. Damn the financial torpedoes, full speed ahead with the monetary printing press.

---

More pain in store for Canadian banks: analyst

Canadian bank stocks have already been hammered by the current wave of credit and liquidity fears, and one analyst is warning investors to brace for further pain and more volatility. Of the Big Six banks, Bank of Montreal and Royal Bank of Canada are raising the biggest red flags when it comes to risk, said Citigroup Inc. analyst Shannon Cowherd. "Both banks have a significant asset base with many potential points of exposure. Neither bank has recorded significant writedowns to reflect the potential exposures," she wrote in a research note.

Ms. Cowherd raised her risk rating on both banks to "high" from "medium" and slashed her price target on BMO from $54 a share to $43, and on RBC from $58 to $47. She maintained her "hold" rating on both banks, citing their size, the lower valuations and the likely resolution to some of the credit concerns by the second half of this year.

The S&P/TSX capped financials sub-index has dropped 14.2 per cent since the start of the year, as investors have sold bank stocks on the continued unravelling of U.S. credit markets, as well as the restructurings of the markets for structured investment vehicles (SIV) and third-party asset-backed commercial paper (ABCP) in Canada.

Shares of BMO have taken the brunt of the selling, tumbling 26 per cent since the start of the year and are trading at $43.62. RBC stock, down 8.3 per cent in 2008, is trading at $47.12. Canadian Imperial Bank of Commerce stock, which has taken a hit from its large exposure to the U.S. subprime mortgage market, has tumbled 14 per cent. Shares of Toronto-Dominion Bank are down 9.4 per cent this year, Bank of Nova Scotia has fallen 12.2 per cent, while National Bank has dropped 10.2 per cent.

Canada's benchmark equity gauge, the S&P/TSX composite index, has fallen 11 per cent from its Oct. 31 high and 5 per cent since the start of 2008 as investors fret, in part, about widening losses in the banking sector on the back of the collapse of the U.S. subprime mortgage market and a U.S. recession.

In the case of BMO, its first-quarter provision for credit losses surged 300 per cent on new impaired loan formations, Ms. Cowherd said. "We expect increased provision for credit losses ratio to cover impairments in current portfolio and any assets brought onto the balance sheet as a result of the SIV and Canadian ABCP restructuring efforts."

Although the market has priced in an estimated $14-billion in writedowns, BMO has to date announced less than $1-billion, she said. RBC, Canada's largest bank, has so far unveiled less than $1-billion in writedowns from disruptions in the credit markets. Based on Ms. Cowherd's calculations, the bank has disclosed at least $8-billion of exposure, or around $2.68 a share loss to either earnings or book value, depending on how it is calculate

---