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Thread: German bank becomes first EU victim of U.S. subprime mortgage woes

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    Default German bank becomes first EU victim of U.S. subprime mortgage woes

    Maybe Melonie had a point......

    But I wonder how heavily invested American banks are. I would think it would be alot less.

    http://www.iht.com/articles/2007/07/30/business/sub.php

    German bank becomes first EU victim of U.S. subprime mortgage woes
    By Carter Dougherty

    Monday, July 30, 2007


    FRANKFURT: A small German bank on Monday became the first European victim of gambles in securities issued by the tottering subprime mortgage business in the United States. The news raised the possibility that a contagion may reach further into European markets than had been anticipated.

    IKB Deutsche Industriebank, a bank that provides loads to medium-sized companies, said that investments in the financial instruments that fueled the subprime lending industry in the United States were sinking in value, threatening its own creditworthiness.

    As a result, the German state bank KfW, which owns 37 percent of IKB, will assume financial responsibility for the investments. IKB's chief executive, Stefan Ortseifen, will also be replaced by Günther Bräunig, a managing director at KfW.

    Since the bank had said only 10 days ago that its investment portfolio was in good shape, the announcement riled credit markets Monday in Europe. The cost of borrowing for major European companies spiked as investors pondered whether subprime-related investments have become a concealed risk for economies an ocean away from the United States.

    "The question right now is whether it will be solely a crisis for financial markets, or for the real economy," said Jochen Felsenheimer, head of credit strategy at UniCredit in Munich. "The challenge that we are facing is that these crises can be self-fulfilling."

    By and large, Europe is thought to be mostly insulated from the crisis among U.S. subprime lenders, who grant mortgages to riskier clients, often those with spotty credit records. Only one major European bank, the British giant HSBC, has itself made significant subprime loans in the United States. (Page 1

    These types of loans are virtually unknown on the Continent, and limited in scope in Britain, protecting Europe from a similar crisis in its own real estate sector.

    But the American banks often sold the loans, which were then converted into tradable bonds linked to the mortgages themselves, and sold on to other investors. Though this technique helped spread the risk of the loans widely, it also created a conduit to export the risk - which turned out to be larger than expected at IKB.

    The German bank had responsibility for a fund, called Rhineland Funding, that was set to lose access to credit after its investments in subprime-related securities were heavily discounted. The German financial regulator, Bafin, stepped in last week to broker the solution.

    IKB's stock plunged 23 percent, to €18.35 in Frankfurt trading.
    Banks offer little concrete information about their investments, leaving analysts to guess about whether other companies might be affected. In Germany, banks might be more exposed than elsewhere because intense competition makes profits hard to come by, said Ian Linnell, head of European banks at Fitch Ratings in London.

    "Domestic banking in Germany is relatively unprofitable because of its structure so the banks go ahead and try to make money elsewhere and there is a danger that they do that through more proprietary trading," Linnell said.
    But Stefan Best, a German banking analyst at Standard & Poor's in Frankfurt, said that his agency's survey of banks in Europe, the United States and Asia in July showed little worry about subprime-related investments.

    "So far the banks feel pretty comfortable," said Best. "There is a pretty high threshold before they would take a hit."

    But even a whiff of crisis at a second-tier German bank led investors to bid up the cost of insurance - known as "credit default swaps" - against defaults in major corporate bonds. The widely watched iTraxx Crossover index rose past 500 on Monday, meaning that it now costs $500,000 to insure a portfolio of $10 million, or about $100,000 more than it did on Thursday.
    Even as stock markets gained a bit, German financial stocks including Deutsche Bank, Allianz, Europe's largest insurer, and Hypo Real Estate, a commercial lend, all took a hit as investors pondered where the next shoe might drop. That said, few analysts expect a meltdown, particularly since banks' balance sheets are fairly healthy.

    "This topic is taking liquidity out of the market, and this was a liquidity-driven market," said Ralf Grönemeyer, an equities strategies at Commerzbank in Frankfurt. "But by and large, the fundamentals are still good."
    Still, market interest in where banks and insurers have put their money is rising rapidly as investors scout about for any other possible European victims.

    "Most banks are likely to report good results but the market is astonishingly uninterested in that," said Simon Adamson, a banking analyst with CreditSights in London.
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    Default Re: German bank becomes first EU victim of U.S. subprime mortgage woes

    But I wonder how heavily invested American banks are. I would think it would be alot less.
    you're joking, right ?

    (snip)"Meanwhile, the analysts said European banks will suffer smaller subprime CDO losses than their U.S. counterparts.

    "European banks tend to be among the most conservative buyers of CDO paper and we estimate that their share of losses will be much smaller than that of the U.S. banks," they said in the report."(snip)

    from


    As I understand it, the big US investment banks are obviously up to their collective necks in toxic CDO's. But many smaller banks are also dependent on CDO's which they purchased as 'insurance' against possible mortgage loan defaults, or as 'insurance' against interest rate moves, rather than as 'investments'. However, in a scenario where the default rate on mortgage loans is rising, if the CDO counterparty goes belly up or otherwise can't / won't pay off on the loss, the smaller banks will have no choice but to take the loss themselves i.e. consuming their own cash reserves. In the absence of new bank deposits from consumers and businesses (yeah, right), this could cause a severe bank liquidity crunch in the near future.

    ~
    Last edited by Melonie; 07-31-2007 at 04:36 PM.

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    Default Re: German bank becomes first EU victim of U.S. subprime mortgage woes

    The question is who do you believe? This from the article I posted.

    "Domestic banking in Germany is relatively unprofitable because of its structure so the banks go ahead and try to make money elsewhere and there is a danger that they do that through more proprietary trading," Linnell said.
    But Stefan Best, a German banking analyst at Standard & Poor's in Frankfurt, said that his agency's survey of banks in Europe, the United States and Asia in July showed little worry about subprime-related investments.


    In our earlier thread we talked about the FDIC and the NCUA. I do not believe they are at risk. I do not even believe that credit unions are at risk. They are alot more conservative than banks generally speaking.

    To me it is mind boggling that anyone in the business would not see the risk involved. These are probably the same people who. on other forums. are blaming people of differant races, economic, and educational backgrounds for the collapse of the housing market. Which to me is just laughable. What all of this boils down to, with everyone involved lender and borrower, is greed.

    It will be interesting to see how this plays out.
    Last edited by Vamp; 07-31-2007 at 06:28 PM.
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    Default Re: German bank becomes first EU victim of U.S. subprime mortgage woes

    In a related story ......

    American Home may liquidate assets, shares plunge

    NEW YORK (Reuters) - American Home Mortgage Investment Corp said on Tuesday it can no longer fund home loans and may liquidate assets, putting its survival in doubt and sending its shares plummeting 90 percent.

    The development was the latest sign the U.S. housing slump is broadening, as worries about credit quality and defaults spread beyond subprime lenders, which lend to people with weaker credit, to lenders that make higher-quality loans.

    American Home, a large mortgage provider, said its lenders cut off access to credit, leaving it unable on Monday to fund $300 million of loans it agreed to make. It expected to be unable to fund $450 million to $500 million of loans on Tuesday.

    Melville, New York-based American Home hired Milestone Advisors and Lazard to help evaluate options and advise on "the sourcing of additional liquidity, including the orderly liquidation of its assets."

    American Home offers "Alt-A" mortgages, which fall between prime and subprime in quality, and recently held a roughly 2.5 percent share of the U.S. mortgage market. Last Friday, it delayed a common stock dividend and announced "major" write-downs.

    "The chances are pretty high that the company either goes bankrupt or materially restructures, leaving little value for shareholders," said Bose George, an analyst at Keefe Bruyette & Woods Inc. in New York.

    "The business model of non-bank, mortgage lenders is challenging, and may be unstable, because they are so dependent on the willingness of the capital markets to fund operations," he added.

    Mary Feder, a spokeswoman for American Home, did not respond to an e-mail seeking comment. Her telephone mailbox did not accept messages.

    American Home shares closed down $9.43 at $1.04 on the New York Stock Exchange. They traded as high as $36.36 last December 6.

    OTHER MORTGAGE COMPANIES FALL

    The news helped cause mortgage and other finance companies to dominate the list of the largest Big Board percentage decliners.

    "It is raising concerns about the whole mortgage market because American Home really didn't do anything in subprime," said Sam Rahman, a portfolio manager at Baring Asset Management Inc.

    NovaStar Financial Inc , a subprime lender, fell 25.4 percent. Mortgage insurers MGIC Investment Corp and Radian Group Inc fell a respective 14.9 percent and 16.1 percent after they said they might write off a combined $1.03 billion invested in a joint venture related to subprime mortgages.

    Many U.S. mortgage providers have struggled with a housing slump that has caused home prices to stall, borrowing costs to rise and defaults to soar. Dozens have tightened lending policies, quit the industry, or gone bankrupt.

    American Home relies on bank financing to help fund home loans. In its statement, American Home said it could not borrow from its credit lines and had "substantial" unpaid margin calls pending to lenders even after meeting "very significant" calls in the last three weeks. The company ended March with $836.9 million of cash and equivalents.

    According to its most recent quarterly report, American Home had obtained financing from several lenders. Among them were Bank of America Corp , Bear Stearns Cos , Credit Agricole SA's Calyon affiliate and UBS AG

    .

    A UBS spokeswoman declined to comment. The others did not immediately return calls.

    If it sought bankruptcy protection, American Home would join New Century Financial Corp and several other home lenders in seeking protection from creditors this year.

    Most of those lenders, however, catered to subprime borrowers, rather than borrowers considered better credit risks.

    (Additional reporting by Kristina Cooke and Dan Wilchins)

    Copyright 2007 Reuters

    http://news.moneycentral.msn.com/pri...731&id=7253852
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    Default Re: German bank becomes first EU victim of U.S. subprime mortgage woes

    In our earlier thread we talked about the FDIC and the NCUA. I do not believe they are at risk.
    By definition the FDIC and NCUA will never be at risk ... because they are backed by the 'full faith and credit' of the US taxpayer and the Fed's printing press. However, the $100,000 limit on FDIC / NCUA account insurance coverage will be of little value to stem 'big time' investor losses or to stem losses by small banks and credit unions themselves.

    As I have been made to understand, the root of the difference between today's financial industry and the financial industry of the 30's, 50's, 70's is that finance has been globalized just like every other aspect of the economy. In the past, small banks and credit unions primarily recycled local money ... i.e. the savings of local residents was used as the basis for small banks and credit unions to obtain credit and borrow larger amounts from wholesale lenders, which the small banks and credit unions then turned around and loaned out to local residents for mortgages, cars, etc. However today, because Americans simply don't save money anymore, small banks and credit unions have become little more than agents / brokers for third party lenders, with the third parties now supplying the 'equity' upon which the borrowing of wholesale lender money is based (whereas local savers supplied that 'equity' in the past).

    In the past, the local saver's 'equity' was real. Today, the 'equity' is very likely to be fictional, with 'credit' having been substituted for real 'equity'. Thus as this situation develops, small banks and credit unions will find themselves in an analogous situation to mortgage brokers, caught in the middle between an increasing number of defaulting borrowers and increasingly cautious third party lenders with little 'equity' of their own to maintain the small bank / credit union's cash flow and wholesale creditworthiness.

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