Sunday, March 23, 2008

Debt Rattle, March 23 2008

A Group Of Upper Volta Investors Prepares To Buy Out Lehman Bros. Kudo Vlad

Ilargi: This should really be a quiet Easter Sunday. It is not. There is too much brewing underneath the calm surface. In the UK, finance moves inexorably towards the front pages, and for good reasons. Trillions of dollars, euros and pounds are thrown at the doomed attempt to save a perverse finance system. And you will have to fork over. I have two articles here that I will post separately this afternoon.

Some Wall St banks seen riskier than poor countries
Turmoil and uncertainty over some of Wall Street's best-known investment banks has left some facing rougher market conditions that price them as riskier than developing countries or banks in volatile areas of the world. Seen for decades as the power brokers in emerging market finance, Wall St firms' sudden underdog status points to the magnitude of fear surrounding them -- and perhaps a degree of confidence in the longer-term stability of developing countries.

Shortly before it received a Federal Reserve-backed rescue package late last week, the cost of insuring the debt of U.S. bank Bear Stearns was higher than that for banks in Kazakhstan, one trader said. On Monday, Bear Stearns was sold for a fraction of its value last week, further undermining global markets and confidence in what were once seen as some of the world's most reliable banks. Early on Tuesday, before it posted results, the cost of protecting debt at Lehman Brothers was 443 basis points, or $443,000 a year for five years, to protect $10 million of debt with credit default swaps.

After Lehman Brothers announced a fall in revenue but beat fearful expectations, its credit default swaps traded at 330 basis points according to Phoenix Partners. One analyst said the bank's position appeared "survivable" -- but protecting its debt is pricier than protecting that of Turkey or Nigeria, traders say. "You could say Lehman is riskier than Nigeria," one trader said, asking not to be named. "But it's not a trade or a comparison people often try to make."

Turkish credit derivatives swaps were trading at 290/298 despite worries over a wide current account deficit and volatile politics. Nigeria's are relatively illiquid but usually priced in the mid-200s, a trader said. Goldman Sachs credit derivative swaps tightened to 160 basis points after the bank said its first-quarter earnings fell by half after recording more than $2.5 billion of losses on loans and other assets, but with robust trading helping the bank exceed market expectations.

But liquidity in global debt markets remains poor with the world's largest banks suspecting each other of not coming entirely clean on losses in the U.S. mortgage market, and many analysts saying more bad news is to come. "I think with Africa people feel they know what they are dealing with," said Razia Khan, head of Africa economics at Standard Chartered in London. "In contrast, everything else is a great unknown." That was despite investors being slightly put off by the speed at which Kenya -- a perceived oasis of East African stability -- collapsed into violence after a disputed election in December.

In credit derivative swaps markets, Turkey was trading at the same level as British bank HBOS, while healthy Brazil with credit derivatives swaps at 191/197 basis points was roughly level with Royal Bank of Scotland. That was despite worries over Turkey's wide current account deficit and concerns over an attempt by the country's secular prosecutors to ban the ruling party from politics for allegedly trying to build an Islamic state. "It gives us some kind of snapshot of relative values," said BB Securities emerging markets research head Paul Hollingworth. "The fundamentals have become secondary to liquidity and technical factors.""

"Most banks in the UK and U.S. are trading well below valuations of top emerging markets banks," he said. "The Brazilian banking system has never had it so good. It is a stark comparison."

The country suffering worst in the credit crisis is not usually seen as a byword for trouble -- Iceland, ranked top in the world according to United Nations human development indicators. Its highly leveraged banks are laboring under a greater proportion of debt than almost any other bank and this sent the Icelandic crown to all-time lows on Tuesday morning and the credit default swaps of its leading Kaupthing Bank to 864 basis points.

Credit binge to hit US firms
IT'S not just US home owners who are having trouble paying bills. There are 93 American companies at risk of defaulting on $US53 billion ($58.8 billion) in debts, a report shows, marking a 50 per cent increase since last June, when the credit crisis started. Many of these debt-laden companies were involved in giant leveraged buyouts.

Standard & Poor's "weakest links" report is forecasting that 75 US companies will default on their debts in the next 12 months. Of the 93 companies at risk, more than half were involved in takeovers by large private equity firms, including Boston's Thomas H. Lee Partners, Bain Capital and J.W. Childs Associates.

The sectors worst hit are media and entertainment, and consumer and retail. Many of the names are familiar to US consumers, like the Boston-based pizza restaurant group Uno Restaurant Holdings; the home goods chain Linens 'n Things; and the Spanish-language television and radio company Univision Communications.

"This is just the beginning," said Diane Vazza, the managing director and head of global fixed income research at Standard & Poor's. For companies struggling with debt payments, she said, "There's no way in a slowing economy, potentially a recessionary economy, to grow out of that".[..]

When a company's debt rating falls to B- or lower, it is generally seen as riskier and is therefore more costly for the company in this environment, because investors demand a higher payment for riskier debt. Historically, 28 per cent of companies with a B- rating defaulted within three years, S&P said; those with a rating of CCC+ or lower defaulted in 43 per cent of the cases. Of 11 companies that had defaulted on their debt so far this year, six were private-equity-backed, S&P said.

Radical action needed to curb US economic downturn
Australian economist Professor Steve Keen warned about dangerous debt levels long before the US credit crisis hit.

Professor Keen, from the University of Western Sydney, says the only way the US can now avoid an economic downturn that could last for decades is to take radical action similar to that taken after the Great Depression. Professor Keen said the US Federal Reserve's strategy of slashing interest rates will not not work this time because debt levels are too high.

STEVE KEEN: There simply has to be a ceiling at some point where the debt burden, no matter no low you drive interest rates, is so strong that people will not consider borrowing again. And when that downturn occurs, there's no engine for the Federal Reserve to re-staff.

ELEANOR HALL: You see a real parallel here with the Great Depression?
STEVE KEEN: I see a strong parallel in terms of the level of debt. The reason being that back in ... debt was really what drove the Great Depression and we're now talking about a level of debt that is 60 per cent above the worst the debt got to be during the Great Depression itself. And I think Bernanke is going to find he has to become a Solomon to cope with all of that.

ELEANOR HALL: Well, what options does he have?
STEVE KEEN: Well, I don't think the options he expects to work, will work. His academic papers imply that he thinks ... and this is almost a direct quote. If we do - all else fails - and we do get into a deflation, you can always rely upon the logic of the printing press to cause inflation once more, in other words, saying he believes that if you get into a serious crisis, what you do is you drastically increase the government-funded money supply, largely by buying some of this totally shonky debt that the private sector in America has put out in the last 10 years. That was tried by Japan. Japan has been in a depression now for 15 years, so I don't believe the mechanism Ben Bernanke is going to rely upon will actually work.

ELEANOR HALL: And anyway wouldn't that mechanism push up inflation at a time when it's already on the rise in the US?
STEVE KEEN: Well this ... inflation in America is actually domestically grown inflation, is actually quite low. Most of their inflation is being imported in a similar sense that some of ours is being imported by rising oil prices and increase in costs of food and resources and so on, and that's beyond their control anyway.

But to a large degree, and Bernanke is making this judgment already and it's a very strong contrast to our own Reserve Bank, that even if inflation is rising, the rising level of inflation is nothing in terms of an economic symptom compared to the level of financial instability which in itself has been driven by debt levels. So, they're saying "Forget inflation, what matters now is financial stability".

ELEANOR HALL: What's your view? Is the United States already in recession?
STEVE KEEN: I'm sure it's in recession right now. It's a question of how deep it goes down, and I expect an extremely deep recession. And I'm noticing that quite a few commentators are now coming around to their view. They also suspect a severe recession to occur in America, and we have similar forces afoot in Australia. We are benefiting from the highest terms of trade in our history at the moment.

We're simultaneously running an enormous current account deficit, which is really a crazy combination. So, we're very heavily reliant upon those prices remaining at unprecedented levels, and they will fall if there... actually there'll have to be a fall in those prices if America goes into recession, and then feeds through to China's demand for our resources and so on. That'll be very problematic for our currency and for our economy.

ELEANOR HALL: When will that hit, do you think?
STEVE KEEN: It's got to be in the next two years. Timing that's any more accurately than that is simply impossible because the whole timing depends upon when we turn around from accepting more debt to trying to pay our debt levels down.

Ilargi: Doug Noland at Prudent Bear agrees with me on with what I have dubbed the Bulgaria Model. The Nationalization of mortgage debt. Look for the same scenario to unfold in the UK. All the recent arrivals form Eastern Europe will feel right at home.

The “average American” is getting slammed by rapid inflation in the prices for fuel, food, healthcare, education and other basis necessities.  He was duped into various dangerous mortgage products to purchase homes with, in many cases, grossly inflated market values.  Millions are in the process of losing virtually everything.  He was also duped into various risky investment products, while the bursting of Bubble markets will leave him dreadfully unprepared for retirement. 

Now, he is seeing the returns from his savings crushed by the melee to bailout Wall Street “money changers” and speculators.  Over the coming months, millions will lose their jobs with the inevitable adjustment and realignment to cope with post-Bubble realities.  And now, apparently, the American taxpayer is to sit back and watch his contingent liabilities balloon (even further) with the Nationalization of the U.S. mortgage market. 

I understand perfectly the motivation Wall Street, the Administration and the Fed have in blindly throwing the “kitchen sink” at this unfolding Crisis.  These are indeed scary times bereft of solutions.  I am certainly familiar with the view that bailing out Wall Street and the speculators is medicine necessary to stabilize the system.  But not only is this approach both inequitable and unethical on moral grounds, it is my view that such endeavors will prove only further destabilizing for the system overall. 

News that the GSEs were Back in the Game in a Big Way added to an already highly unsettled situation for myriad sophisticated trading strategies.  But before getting too excited about the spectacular short-squeeze, keep in mind that shorting has become an instrumental facet of leveraged speculator trading strategies – and, really, “contemporary finance” more broadly speaking.  And the disintegration of an ever increasing number of hedge fund and Wall Street strategies, as I’ve written previously, remains at the Heart of Deepening Monetary Disorder.

Not surprisingly, the Fed could not risk a Bear Stearns failure - not with all of its derivative, “repo” and counterparty exposures.  It really was not a difficult fix.  Yet the rapidly lengthening line of vulnerable non-bank lenders (Thornburg, CIT Group, and Rescap come immediately to mind) and hedge funds will pose a greater challenge.  There are some very substantial balance sheets at risk and significantly more “de-leveraging” in the offing - and the big banks will have no appetite. 

The profound deterioration in the U.S. and global Credit backdrop has greatly altered prospects for the vast majority of companies, industries, and the U.S. and global economies more generally.  Despite any number of policy actions and all the good intentions imaginable, there is absolutely no way that the U.S financial system will now be capable of sustaining either the (pre-bust) quantity of Credit or the uniform flow of finance that levitated Bubble Economy asset prices, household incomes, corporate cash-flows, “investment” spending or consumption.  Huge sections of the Credit infrastructures (notably throughout Wall Street-backed finance) are inoperable and disCredited.  Prominent Monetary Processes have been broken and the resulting Flow of Finance radically revamped.  

Prospective Credit and financial flows will prove insufficient for scores of companies, as well as for state and local governments and various entities all along the economic food chain.  Enormous numbers of business downsizings and failures – many by companies that thrived during the Bubble Era – will lead to huge losses of jobs and incomes (many at the “upper end” where the greatest excesses transpired).  I simply see no way around it – Nationalization of U.S. mortgages notwithstanding. 

It is fundamental to my analytical framework that efforts to subvert the Unavoidable Adjustment Process only extend the misallocation of finance and real resources, while adding greatly to the future burden of the financial institutions today aggressively intermediating very risky pre-adjustment Credit (certainly including the banking system and GSEs).  And I certainly don’t believe this week’s rally in the dollar should be viewed as a vote of confidence for the direction of U.S. policymaking.  Nationalization will prove a further blow to already fragile confidence.

U.S. has entered "recession of choice"
The United States has entered a recession that could have been avoided had policy-makers been more willing to heed warning signs and take preemptive action, according to a New York forecasting firm.

The Economic Cycle Research Institute, a firm that focuses on identifying peaks and troughs in the business cycle, made its official call on Friday, stating that the U.S. economy had "unambiguously" entered a recession. Yet ECRI researchers believe the current troubles were far from inevitable, since a precocious wave of negative sentiment about the economy during 2007 gave the Federal Reserve, Congress, and the White House plenty of time to act.

"This is a recession of choice," said Lakshman Achuthan, ECRI managing director. "The business cycle does not sit around and wait." He said both aggressive interest rate cuts last year, combined with a more immediate fiscal stimulus package than that delivered by Washington, could have prevented what may prove to be a painful downturn. "We wasted our luck," said Achuthan.

Perversely, this inaction is likely to hit low-income Americans even harder than usual, said Achuthan, because the Fed's belated liquidity injections have pushed food and energy prices to record highs. "Now they are throwing a lot of liquidity out, (but) it's going to food and energy," he said. "This non-discretionary consumer spending makes up the lion's share of the low-income consumer's budget. So the Fed is trying to help out, but it's really hurting the low-income consumer." 

Bank of America May Take $6.5 Billion Loss Provision
Bank of America Corp., the second biggest U.S. bank by assets, may take a record $6.5 billion provision in the first quarter to cover possible future losses in its home equity and mortgage portfolios, Punk Ziegel and Co. analyst Richard Bove wrote. Whether the two portfolios have that level of loss will depend on the economy and developments in the housing markets, Bove wrote in his e-mailed March 24 report. The bank, meanwhile, will experience only a shift in equity and still report a profit, he wrote. The bank plans to release first-quarter results April 21.

"At the moment, I do not foresee the economy plunging to a level that will substantiate this reserve build," wrote Bove, who has a "buy" on the shares and doesn't own any of the stock. "This is due to a belief that the change in the value of the dollar will stimulate growth and that the actions by the Federal Reserve will take effect." The world's biggest banks and securities firms have disclosed at least $195 billion in writedowns and credit losses since the start of 2007, as mortgage and debt markets seized up. Bove advised selling financial shares eight months ago, before they tumbled.

Bank of America plans to buy Countrywide Financial Corp., the biggest U.S. mortgage lender, in a stock swap originally valued at about $4 billion. Investors have speculated Bank of America may try to cancel or modify the accord because the housing market has continued to deteriorate. Bank of America is receiving payments for credit cards and mortgages from distressed households that are defaulting on home equity loans, Bove said. This indicates that people are trying to keep their homes, which conflicts with the premise that they are walking away and turning over their keys to the banks.

"Clearly they are trying to reach some accommodation to hold on to their houses and their credit ratings," Bove wrote. "It is my impression that Bank of America is likely to accommodate these households under the theory that it makes no sense to repossess the house." Housing is becoming affordable, Bove wrote, based on the research of Stuart Feldstein at SMR Research. Feldstein said the housing slump is bringing prices back in line with incomes, according to Bove's note.

Big mortgage lenders hit hardest by crisis as funds dry up
The biggest mortgage lenders are bearing the brunt of the fallout from the credit crunch, according to research which shows that many consumers are turning to smaller rivals to find more competitive deals. The credit crisis and a slowing housing market have forced lenders to reassess their attitude to risk-based lending and many have tightened up their lending criteria in the past couple of days.

Less than a third of the top mortgages on the market come from the UK's 10 largest lenders, the price comparison website has revealed. In 2006, these large lenders accounted for three-quarters of gross mortgage lending, but they now offer just 68 of the leading 250 mortgage products, down to 27 per cent.

As the credit crunch bites, consumers are finding it more difficult to get a mortgage. Lenders' funds are drying up, forcing them to scrap cheap fixed-rate deals and 100 per cent-plus loans. First-time buyers are finding it even more of a stretch to get a foot on the ladder as higher deposits are demanded from lenders.

A number of smaller building societies, including Bath Building Society and Earl Shilton Building Society, withdrew all their home loan products this week after they were unable to secure funding for lending.
Building societies rely on interbank lending for as much as 30 per cent of their funds. But on Thursday, the London interbank lending rate – the rate at which building societies and banks borrow – increased to 5.97 per cent, more than 0.7 per cent higher than the Bank of England base rate.

Although this is mainly affecting smaller building societies, there are fears some of the bigger ones are coming under pressure. Denise Harvey, a mortgage analyst at Moneyfacts, said: "Post-credit crunch, some of the larger lenders appear to have suffered the most – previously they had been able to fund a large section of their lending through the money markets, but today that just isn't possible."

click to enlarge

As cheap deals disappear, mortgage borrowers are facing "payment shock" when their fixed-rate mortgage ends, analysts said. More than a million fixed-rate deals, which generally last for two years, are set to expire this year.

Bradford & Bingley hit by rating cut from Moody’s
The buy-to-let mortgage specialist Bradford & Bingley has had a key credit-rating cut by Moody’s, amid a sharp jump in the number of customers falling behind with repayments. B&B’s “bank financial strength rating” (BFSR) has been cut by the agency from C+ to C, with warnings of further downgrades to come.

The ratings agency describes the BFSR as “a measure of the likelihood that a bank will require assistance from third parties such as its owners, its industry group or official institutions”. If the rating were cut one more notch, the Moody’s definitions suggest the bank could potentially require support from the Bank of England. Separately, regulatory filings made by B&B’s wholesale funding vehicles late last week indicated that the bank has seen customer arrears jump by between 40% and 50% since December.

Analysts said the figures were still very low, at little more than 2% of the bank’s total book, but were surprised at the rate of increase. B&B has said it was fully funded until the first quarter of 2009. Moody’s praised B&B for continuing to access funding through the tough market conditions, and for attracting an additional £1.3 billion of savers’ money in the first two months of the year. B&B declined to comment on the rating change.

Mervyn King bows to Fed-style rescue deal
Britain’s banks believe they have secured a deal under which the Bank of England will provide the kind of support America’s Federal Reserve has given to its beleaguered financial institutions in recent months. Though no precise commitments were given when senior bank executives met Mervyn King, the Bank’s governor, last week, it is understood that there was tacit agreement that the central bank would step in to provide bigger injections of liquidity into the markets when needed, and accept a wider range of collateral against such support.

The Bank also promised to try to limit any stigma attached to such assistance, though officials concede this will be difficult.
King fell short of meeting all the bank chiefs’ demands, including requests for an overhaul of the entire system under which emergency funding is provided. The Bank’s new money-market arrangements only came into effect last year. The new help will be given on an ad hoc basis.

The governor is also said to have made clear that while he had an obligation to protect the financial system, his remit did not stretch to propping up the banks’ profitability, a sign that not all the rancour that characterised the relationship between King and the banks last summer has disappeared.

One senior banker said: “The governor doesn’t realise that bank profitability and stability of the system go hand in hand. The banks’ reserves have been eroded. They will not be able to lend freely until their capital is built up again. If he cut rates at the front end of the curve, as the Fed has done, then banks would be able to very gradually restabilise over the next two to three years, which would give them much more confidence to continue lending.”

Bankers say, however, that there is a new determination on the part of both King and the banks to work together to get through the crisis following the scare generated by the slump in the share price of Halifax Bank of Scotland (HBOS) last week. The test will come with what happens to money-market interest rates in the coming days, with three-month Libor currently near 6%.
“Banks are not worried that other banks will go bust,” said one senior banker. “It’s just that they think they will need all their money for themselves, to meet customers’ demands. Why lend money when you think you will need it all yourself?”

Can Mervyn King's billions shore up the banks?
The anger among Britain’s bankers had been building for weeks, much of it directed at Mervyn King, the Bank of England governor. As the tensions rose last week, they threatened to burst into the open. “King doesn’t seem to get it,” said one senior banker. “Everybody else is putting all hands to the pumps, but the Bank of England has seemed content to sit on its hands.”

Another contrasted the approach of Hank Paulson, the US Treasury secretary, and Ben Bernanke, chairman of the Federal Reserve, with that of Alistair Darling, the chancellor, and King. “We know exactly where Hank Paulson and Ben Bernanke stand,” said the banker. “They have said they will do everything possible to ensure that their financial system is protected. But what does King stand for? Who knows?”

That, say analysts, has been in sharp contrast to the clarity of the American approach. “Everything we have seen from the American authorities has the classic hallmark of Hank,” said one former colleague of Paulson from his time as head of the investment bank Goldman Sachs. “He has a very consensual leadership style. He gets as many opinions as he can.”

The conversations British bank bosses have been having with King were different, they say. Since the summer, when King first avowed that he would not step in to bail out the banks for their irresponsible lending on “moral hazard” grounds, Britain’s top bankers have felt they are fighting the credit crisis with one hand tied behind their backs.

Some claimed to have detected differences of opinion within the Bank. Paul Tucker, the Bank’s executive director with responsibility for markets, and Alastair Clark, a former senior figure brought out of retirement in the autumn, are said to have given them a more sympathetic hearing than the governor. King’s stance was said to have been the subject of significant disagreement within the Bank, with some senior figures arguing that the credit crisis was too serious for him to stand on ceremony. News earlier this year of King’s reappointment as governor for a second five-year term brought groans from some in the sector.

The result of the bankers’ disquiet was an unprecedented behind-the-scenes lobbying campaign. The chairman and chief executives of Britain’s biggest high-street banks have been in regular telephone contact – something they normally shy away from – to establish a way to lobby for King to pump more money into the system to match the dramatic action taken by America’s Federal Reserve and the European Central Bank.

Bank of England Seeks to Ease 'Strains' in Markets
The Bank of England said it's in discussions with other central banks about how to "ease the strains" in financial markets, although it's not considering requiring taxpayers to assume credit risks. Britain's central bank said it is "not among" those that the Financial Times reported earlier today were contemplating the purchase of mortgage-backed securities to smooth lending to consumers after a worldwide surge in borrowing costs. The Federal Reserve also denied it's in discussions to buy such debt.

"We have been examining a number of other options, but it is too early to go into any detail," the London-based Bank of England said in a statement. "The bank is not among those reported today to be proposing schemes that would require the taxpayer rather than banks to assume the credit risk."

Financial institutions have criticized the Bank of England for not doing enough to ease conditions in money markets. Bank of England Governor Mervyn King offered an extra 5 billion pounds ($9.9 billion) in loans to banks on March 20, the first move of its kind in six months to push the cost of borrowing by banks closer to the 5.25 percent benchmark rate. King will discuss his strategy in a hearing with lawmakers in Parliament on March 26.

London's interbank offered rate, or Libor, for three-month loans in pounds, climbed to 5.99 percent on March 20, the highest since December after the collapse of the subprime mortgage market in the U.S. made banks reluctant to lend to each other. The surge in credit costs has choked off lending to consumers in the U.K., especially for new home loans. Banks including Alliance & Leicester Plc, Bradford & Bingley Plc and HBOS Plc Scotland have withdrawn loan offers and raised the cost of borrowing in recent weeks.

"Demand for mortgages remains strong but cannot be fully met from existing funding," Michael Coogan, director general of the Council of Mortgage Lenders, said in a statement on March 20. "Many lenders have had to reduce their product ranges, increase their mortgage prices and, in some cases, to reduce their lending."

Mortgage lending fell to 24 billion pounds last month, 7 percent less than January and 31 percent below the level in June 2007, just before the credit crunch started. House prices, which tripled in the last decade as banks made credit more affordable, have fallen in each of the past four months, the longest streak since 2000, according to Nationwide Building Society.

Fear drives markets as investors worry which bank is next
It will be difficult for the economy to grow or for the market to reverse its course while fear is stalking the financial world.

Fear is why Bear Stearns Cos. was hit with what amounted to a run on the bank and now is being sold for $2 per share, a 97 percent discount to where its shares were trading a week ago.

Fear is why the Federal Reserve is pulling out all the stops to manage the financial market turmoil, hoping to prevent conditions from turning so ugly that investors everywhere run for the doors.

Fear is why this credit crisis won't be resolved anytime soon, because there are too many unknowns still lurking around the financial system that make it hard for anyone to feel confident about a better tomorrow.

The financial problems are not new. The troubles were set off last year by the alarming rate of defaults on subprime mortgages, which then caused an aversion to risk among lenders everywhere, who tightened their borrowing standards. What's different now is how the turmoil has intensified in the past two weeks. Suddenly, we are seeing a widespread retrenchment of funds from all corners of the financial world.

That's particularly problematic for Wall Street firms, which have a client base consisting of individuals, companies, hedge funds and pension funds. They also lend and borrow billions of dollars daily with their financial-company peers. Should questions of liquidity arise at any of those players, it can roil the entire financial system.

"Wall Street CFOs have known for over 20 years that the loss of confidence is a life-threatening risk for a securities firm," said Brad Hintz, senior analyst at Sanford Bernstein. "Liquidity risk has been and remains the Achilles heel of the securities firms."

Inside the hunt for the City's bank raiders
Conspirators who drove down the share price of one of Britain's biggest mortgage lenders are being hunted by a sophisticated computer system. But what chance do investigators have of tracking down the culprits?

Investigators will deploy a powerful computer system known as 'Sabre' to track down the conspirators who threatened to collapse the share price of Britain's biggest mortgage lender and endangered the financial stability of the entire country.
The plotters planted scurrilous suggestions last week that HBOS - the parent company of high-street stalwarts the Halifax and the Bank of Scotland - was in financial trouble.

Had the panic this caused not been averted, the loss of public confidence in the bank could have resulted in queues snaking outside its branches in scenes reminiscent of Northern Rock. Another bank run would have put the entire system in jeopardy and risked the savings of millions of people. Now the Financial Services Authority (FSA) is determined to prevent a repetition. Chief executive Hector Sants and his team will begin this week to painstakingly piece together evidence, following an electronic trail that they hope will lead to the rumour mongers.

Sants's secret weapon is the Surveillance and Automated Business Reporting Engine, or Sabre, a computer system that digests vast amounts of detailed information on every single share trade on the London markets, some five million transactions a day in normal dealing conditions. Sants believes that, armed with the information gleaned from Sabre, his troops - who can insist on examining tapes of phone conversations and computer records - will be able to strike the fear of god into the City.

The drama at HBOS unfolded with terrifying speed. At 8.29am on Wednesday, Andy Hornby, its young but highly regarded chief executive, was ensconced in his headquarters in Old Broad Street in the heart of the City, unaware of the carnage that was about to be unleashed. One minute later, he could only watch his screen in horror as the bank's shares began a vertiginous slide. 'By 8.31, I realised this was going to be one of the busier days of my career,' he said. 'I heard rumours were flying round trading desks that we were in trouble, that the governor of the Bank of England had cancelled a trip to Asia and that he had cancelled staff leave over Easter. It was all false.'

A few minutes later, an automatic halt mechanism on HBOS shares was triggered on computers at the London Stock Exchange because of the wild discrepancies on the prices being posted on the system. Trading resumed just before 9am and the shares promptly dived by nearly a fifth. Hornby was acutely aware that he did not have a second to lose if he were to save his bank. By 9.01, HBOS had issued an official denial. 'This was the most vindictive and serious sort of rumour you could plant about any company at the moment,' he said.

The phantom bank raiders were armed with something much more potent and destructive than guns: rumour. They then deployed a technique called 'short-selling' - in simple terms, they placed a bet that its share price would fall. The operation, known as 'trash and cash', was designed to net them huge personal profits at the expense of the bank's two million small investors, its savers and mortgage borrowers and its 65,000 staff, virtually all of whom hold shares. Had they succeeded with HBOS, other high street banks would have been next on their hit list, causing untold financial damage to virtually every family in the land.

But in Threadneedle Street, just yards away from HBOS head office, the Bank of England rallied round, issuing a denial that the bank was in difficulty or that the governor had called off a foreign trip, though Mervyn King had, rather more prosaically, postponed a visit to West Bromwich. King also agreed on Friday to inject £5bn of extra cash to ease liquidity problems in the banking sector.

Financial suicide missions that scare the hell out of us
How Osama Bin Laden must be laughing at us from his cave in Afghanistan. We marked the fifth anniversary of the start of the Iraq war with a suicide mission intent on destroying our own economy and banking system. There has never been any doubt that the planes which targeted the twin towers of the World Trade Center flew not just to kill as many Americans and Europeans as they could at a stroke. It was a symbolic attack designed to strike right at the heart of capitalism.

He needn't have bothered. If he'd just waited a while, the teenage terminators who stalk our trading floors would have done his dirty work for him. How their grandfathers must be turning in their graves. It seems the children of the heroes of the Battle of Britain have spawned a new generation of kamikaze pilots intent on our destruction. Rather than the enemy, it is us they have in their sights.

By us, I mean anyone who has a savings account, mortgage, pension or indeed job. The serious consequences for everyone, had last week's attack on Halifax Bank of Scotland's share price succeeded, don't bear thinking about. The shameless episode was motivated by ruthless greed on the part of a few, and irresponsible imbecility by the many.

I'm no apologist for HBOS, and am fully aware they engaged in some of the high risk lending which fills me with horror. But they did this through a small subsidiary, and it's peanuts compared with the rest of the business. I would ask myself how would HBOS cope if the market crashed? And for that I would look to their record. And I would find the answer is: they are better placed to manage and survive a substantial property downturn than almost any other business in Europe.

How do I know? Because Halifax emerged from the housing slumps of the early 1970s, 1980s and 1990s stronger not weaker, when competitors went to the wall. As the UK's biggest mortgage lender, it has been managing its business through busts as well as bubbles for generations. It knows how to do it.

Banks prepare for legal action against hedge funds
Irish banks are lining up with regulators in Britain and Ireland, to pursue legal action against hedge funds suspected of spreading misleading information to profit from recent stock market falls. Market sources have identified at least four specialist hedge fund firms, based in London and the US, that are believed to have bet heavily on sharp declines in the share prices of British and Irish banks.

Regulators are expected to probe their trading patterns and any communications they may have had with other market participants to establish whether they were guilty of illegally manipulating share prices. The action comes after a hectic week’s trading on stock markets around the globe. Bank stocks suffered large falls early last week before staging a recovery, following assurances from the Bank of England that it was unaware of any British institution experiencing liquidity problems.

In Ireland, the Financial Regulator attempted to calm local market concerns last Thursday by launching an investigation into suspicious transactions on its radar. One Dublin-based senior banker said last week’s events were ‘‘extremely serious’’, but expressed confidence that investigations would uncover the attempts to manipulate the markets.’ ‘Someone has left an audit trail,” he said.

The Iseq index of Irish shares fell to its lowest level in three years last Monday, 43 per cent off its all-time high just 13 months ago. Bank shares suffered heavily on the back of last weekend’s collapse of US heavyweight Bear Stearns and fears about the stability of individual institutions. Shares in Anglo Irish Bank tumbled 23 per cent at one point last Monday before closing down 15 per cent. AIB, Bank of Ireland and Irish Life & Permanent fell by between 9 and 12 per cent, before closing down 5 or 6 per cent.

Banks warned to curb payouts as crisis bites
Bank of England governor Mervyn King used his now-famous meeting with the chief executives of the "big five" UK banks last Thursday to admonish them for increasing shareholder dividends, as they came begging for more aid to help resolve their liquidity problems, the Sunday Herald understands. The dividend increases have been the source of much market controversy amid the financial turmoil of recent weeks.

Colin McLean, chief executive of SVM Asset Management and a long-time critic of UK banks, said: "It just seems wrong that bankers are looking for support and essentially public money at a time when both dividends and executive pay are not only high but have also just been raised." On February 27, HBOS hiked its dividend by 18% to 48.9p meaning the bank offers a yield of 6.9%. Some observers have criticised the move as being designed to reassure investors and the wider public that its capital position is secure.

It also lowered the targets under which directors would receive payouts on its executive incentive schemes. Last Thursday's meeting at Threadneedle Street came the day after the extraordinary "bear raid" on the shares of the UK's fifth-largest bank, HBOS. The Edinburgh-based bank's shares crashed by 17% on Wednesday morning amid rumours it was seeking emergency funding from the Bank of England and that it had called a halt to all corporate lending. Andy Hornby, the bank's chief executive, later said the rumours were "utter trash". Their source is now under investigation by the Financial Services Authority.

Even after recovering slightly towards the end of last week, HBOS's shares have fallen by 58% from their February 2007 peak (when they reached 1153p). Having closed on Thursday at 473.75p they are 40% down from their value at the time of Halifax's merger with Bank of Scotland seven years ago. Hornby - together with Sir Fred Goodwin, chief executive of RBS and the bosses of Barclays, HSBC and Lloyds TSB - went to visit King at the Bank of England in what bank sources describe as a "routine and pre-planned meeting".

At the meeting, they urged the governor to take his lead from Ben Bernanke and the US Federal Reserve and open the monetary taps. They are believed to want King to make a more public display that he is prepared to do more to end the financial crisis that has engulfed credit markets. In particular they are understood to have pleaded for more than the £10.9 billion of short-term funding that the Bank of England said it would release on Thursday. Instead they want indefinite money secured against much wider collateral than has been permissible in the past.

King has, on two recent occasions, publicly demanded that UK banks do more to strengthen their balance sheets, so that they can maintain their capital ratios and support lending even at times of deteriorating credit quality. However, the bankers have turned a deaf ear to these blandishments, instead insisting that they do not need any more capital and hiking their dividends in what some see as a herd-like display of machismo.

Carla Antunes da Silva, bank analyst at JP Morgan, said: "We believe UK banks to be still very much in the denial phase'." She added that "HBOS remains one of the most structurally impaired banks, in our view, with an estimated capital shortfall of £11.4bn." Last week she advised investors to remain underweight in the shares. However, Hornby described Antunes da Silva as having taken a "highly personal view" and of basing her calculations on an "Armageddon scenario".

Banks are not out of the woods as bears tighten their squeeze
One observation offered on the financial crisis last week was that there is a degree of schadenfreude among the banks. They may be sharing each other's pain, but let's not forget that this is a rough old world and one's weakness is another's opportunity.
Truth be told, not many people will feel sorry for beaten-up bankers any more than they will for troubled estate agents now desperate to sell houses after the boom-fuelled pricing of recent years, or even journalists who get the blame for all the world's ills.

But this goes deeper than giving the banks a bloody nose. While they may occasionally deserve roughing up to knock the arrogance out of them, the whole economy depends on their well-being and Scotland would be in a sorry state if the banks were to suffer any lasting damage. Andy Hornby, chief executive of Edinburgh-based HBOS, was press-ganged – in the modern sense of the phrase – into making rare public utterances outwith the bank's twice-yearly results statements as soon as he realised how serious the crisis had become. As he admitted, the stability of the whole banking system was at risk. It doesn't come much more serious than that.

There was also an immediate response from the Financial Services Authority and the Bank of England, an encouraging sign that they had learned something from their dithering over Northern Rock. Unfortunately, the FSA's promise to root out market abuse hardly inspired hope that anything will actually come of it. In its 10 years of existence it has done nothing to stop this sort of behaviour and no one expects it to get a result this time.

As for the Bank of England, its underwhelming four-line response to Thursday's meeting with the chief executives of Britain's banks merely displayed its disdain for public opinion and did little to reassure customers, investors, employees or anyone else with a stake in the banking system. It is to be hoped that it is at least working privately on plans to restore confidence.

And so to this week. When the markets open on Tuesday there is the prospect of some uplift on the back of the Bank of England's pledges of support to maintain the required levels of liquidity. There may also be a continued rally on the Dow Jones which rose 262 points on Thursday, ending one of the most volatile weeks in US stock market history.

The coming week will see a batch of US economic indicators on home sales, durable goods orders, consumer confidence and spending, and because the markets expect only bad news from each one, anything better than terrible will be seen as positive and could help to support any uplift in the markets. Ben Bernanke, the Federal Reserve chairman, will be keeping his fingers crossed that his latest medicine – including a three-quarters of a point cut in interest rates – will perk up the patient, and some analysts are now brave enough to start calling the bottom of the market.

But the gloomy warnings keep on coming despite the more optimistic noises emerging from across the Atlantic. The latest Merrill Lynch fund managers' survey reports "record risk aversion and record cash" and contains the raw ingredients of a classic bear squeeze. The number of respondents who believe a global recession is upon us has risen sharply and the prospect of stagflation – inflation and recession – looms large.

The survey, which was taken in the days before Bear Stearns and the HBOS crisis, showed a particular aversion to financials. Unless there really is some upturn in sentiment, the next survey threatens to be gloomier still. For now, it looks like the banks may b e out of the woods, but we've had too many wrong calls from those suggesting the road to recovery is now in sight. What's more, the pain in the UK and in Scotland may be still to come. The much-talked about recession is not yet in evidence, but is widely accepted as a given.

Why a dollar bailout won’t happen
Could the dollar be next in line for a bailout? That question has been the subject of discussion among currency experts after the greenback suffered a steep decline against a host of different currencies in recent weeks.
But it's one thing to talk about a rescue. It's another to pull one off. "Given all the forces waging against the dollar at the moment, the question of success is another matter entirely," said Neil Mellor, currency strategist at Bank of New York Mellon.

Fears of further fallout in financial markets last week sent the greenback cascading to successive historic lows against the euro and levels against the yen not seen since 1995. That only gave credence to speculation that foreign central banks could step in and buy the dollar to help prop up its value. Stephen Jen, Morgan Stanley's head of foreign exchange research, said last week that the dollar is on "intervention watch" because of its recent weakness.

But hurdles to a bailout remain. For one, the world's central banks are not on the same page when it comes to monetary policy. The Federal Reserve, trying to keep the U.S. economy from tipping into a recession, is cutting interest rates. On Tuesday, it lowered rates by three-quarters of a percentage point to 2.25% - its sixth cut in six months. These rate cuts are one factor behind the dollar's weakness since they make debt and other investments pegged to the dollar less attractive.

Meanwhile, other monetary policymakers, including the European Central Bank and the Bank of England, have held rates steady recently to keep inflation in check. Divyang Shah, a strategist for foreign exchange and fixed income at Commonwealth Bank in London, argues that a bailout can't work with such divergent policies. "If [the Fed is] injecting liquidity, that is not an environment for any intervention to work," he said. Typically, a bailout entails central bankers ramping up the reserves of whatever currency they are trying to support.

The last time central banks staged a coordinated intervention was in September 2000. That's when the Federal Reserve and the Treasury Department - along with the European Central Bank and other monetary authorities - bought euros after that currency suffered a steep decline against the dollar. Today, much of the world's dollar reserves are held not only by Group of Seven central banks but also by the fastest growing economies around the globe, including India and China as well as oil producing nations like Saudi Arabia, whose primary export and source of wealth - oil - is priced in dollars.


Undertow said...

Just wondered if you spotted this from The Times.

Bishop of Rochester: save your souls, you greedy bankers

Britain's richest men and women must curb their greed and begin sharing their wealth to save their souls, one of the Church of England’s senior bishops has warned.

Dr Michael Nazir-Ali, the Bishop of Rochester, singled out high-earning City traders such as hedge fund managers as the kind of people who must swap their desire to “make a quick buck” for a commitment to “share [their] wealth generously”.

He said the crisis gripping the world’s money markets was “almost certainly” due to amoral forces pursuing their own wealth-creating agenda and warned that without action the less wealthy might suffer disproportionately from the fallout.

“What is required is a change of heart, of disposition, of attitude,” he writes in his Easter message, published in The Sunday Times today.

Musashi said...

Looking at it as a neutral observer some form of nationalization is inevitable.

The least objectionable way would be if the shareholders and management get wiped out, management is legally forced into restitution of bonuses, and individual borrowers that do not fulfill their contractual obligations get equally wiped out.

We all are going to pay a heavy price, shit happens, pay and move on.
Some may not make it. C'est la vie.

Bigelow said...

The world was saved last Sunday and Bear Sterns corporate officers got to keep their year end bonuses too! I can't take much more of this.

Musashi said...

Karl has a new petition up.