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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