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Thread: Wall St sinks as subprime troubles spread

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    Default Wall St sinks as subprime troubles spread

    http://news.yahoo.com/s/nm/20070809/...hupDXfjOlv24cA

    Wall St sinks as subprime troubles spread

    Reuters
    By Jennifer Coogan 41 minutes ago

    Stocks tumbled on Thursday, with the Dow and S&P down nearly 3 percent, after a French bank froze three funds that invested in U.S. subprime mortgages, prompting central banks to take steps to calm investors.
    Evidence the U.S. mortgage market crisis was having a global impact and spreading to other markets hammered financial stocks.

    Goldman Sachs Group(GS.N) dropped nearly 6 percent after the Wall Street Journal reported a second fund managed by the investment bank was under pressure to sell assets after falling in value. The S&P financial index fell 3.8 percent and the sector was one of the biggest drags on the S&P 500.
    "The Fed has said the subprime issue is contained," said Hugh Moore, partner with research-based advisory firm Guerite Advisors in Greenville, South Carolina, referring to the Federal Reserve. "It's spread not just outside the industry, but outside the U.S. That really has people spooked."
    Nature knows no indecencies; man invents them. ~ Mark Twain


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    Banned Katrine's Avatar
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    Default Re: Wall St sinks as subprime troubles spread

    Time to buy!!

    "Have you ever been to American wedding? Where is the vodka, where's marinated herring?" - GB
    "And do the cats give a shit? No, they do not. Why? Because they're cats."-from The Onion

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    Default Re: Wall St sinks as subprime troubles spread

    The comments by French bank BNP Paribas were highly telling, and the comments by the ECB were downright scary ...



    (snip)" ``There are securities which simply can't be priced because there is no trading in them,'' Timothy Ghriskey, chief investment officer at Solaris Asset Management LLC in Bedford Hills, New York, said in an interview today. ``There are no bids for them. Asset-backed securities, mortgage loans, especially subprime loans, don't have any buyers.''

    The French bank joins Bear Stearns Cos. and Union Investment Management GmbH in stopping fund redemptions. Dutch investment bank NIBC Holding NV said today that it lost at least 137 million euros on U.S. subprime investments this year.

    BNP Paribas shares fell as much as 6.4 percent, and closed 2.88 euros lower at 82.57 euros in Paris, valuing the bank at 77.3 billion euros. The stock is little changed this year.

    Losing Value

    ``The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating,'' BNP Paribas said in a statement.

    The European Central Bank today pumped 95 billion euros into the overnight lending market in an unprecedented response to a sudden demand for cash from banks roiled by the subprime collapse.

    BNP Paribas's Chief Executive Officer Baudouin Prot said the bank's exposure to U.S. subprime was ``absolutely negligible'' when the company reported a 20 percent increase in second-quarter net income last week. BNP Paribas Investment Partners oversees about 356 billion euros.

    ``On BNP's scale this isn't too significant,'' said Benoit de Broissia, an analyst at Richelieu Finance in Paris. ``It will impact clients. It's more of an image problem.''

    The three funds are Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia.

    `No Prices'

    The Hague-based NIBC, which is owned by a group including J.C. Flowers & Co., said ``severe instability'' in U.S. credit markets reduced the value of its U.S. asset-backed securities. The company expects ``further mark-to-market losses.''

    Union Investment, Germany's No. 3 mutual fund manager, stopped withdrawals from one of its funds on Aug. 3 after investors pulled about 10 percent of the assets. Frankfurt Trust, the mutual fund manager of Germany's BHF-Bank, halted redemptions from a fund after clients removed 20 percent of their money since the end of July.

    Two hedge funds run by New York-based Bear Stearns filed for bankruptcy protection in the Cayman Islands on July 31 following subprime losses. The New York-based securities firm then blocked investors from withdrawing money from a third fund.

    ``For some of the securities there are just no prices,'' Alain Papiasse, head of BNP Paribas's asset management and services division, said in an interview. ``As there are no prices, we can't calculate the value of the funds.'' (snip)


    'No prices' obviously means no buyers willing to offer a price higher than a tiny fraction of the original valuation of the mortgage backed securities and CDO's ! What is not known AT ALL is the total dollar value of such mortgage backed securities and CDO's, but anecdotal info leads to the conclusion that we're talkling many trillions of dollars worldwide.

    This is clearly the beginning of a worldwide liquidity crisis, as hedge fund investors attempt to withdraw money and are not allowed to do so, as 'regular' investors withdrew / cashed in 95 billion euros worth of investments (= about 125 billion dollars) from european banks in a single day ...
    Last edited by Melonie; 08-09-2007 at 04:24 PM.

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    Default Re: Wall St sinks as subprime troubles spread

    and the following is some professional commentary as to why the ECB action was downright scary ...

    (snip)" ECB and Federal Reserve Step In

    This morning the LIBOR rate rose by the fastest pace since June 2004, triggering a wave of concern amongst central banks. In dollar terms, the overnight lending rate jumped from 5.35 percent to 5.86 percent, a six year high. Euro rates climbed to 4.7 percent, while sterling rates hit 6.16 percent (both are new 6 yr highs). Fears of a credit crunch forced the European Central Bank to step in and inject EUR94.8 billion in emergency funds to calm the markets. The last time that the central bank injected liquidity was right after 9/11, which gives the market a gage of how serious the credit crunch has become. In fact, the amount injected in September 2001 was only EUR69.3 billion, 25 billion less than today. The Federal Reserve followed suit by adding $12 billion in temporary reserves via 14-day repurchase agreements. Unlike the ECB however, the Fed does repurchase operations every week, the only difference is that the repurchases today were more than double the amount done last Thursday. Both central banks are trying desperately to calm the markets. Even the Bank of Canada issued a statement saying that they are ready to add liquidity to the Canadian financial system, if necessary.

    Conditions must have deteriorated significantly because as recently as two days ago, the FOMC statement indicated that tighter credit conditions were not a threat. The same sentiment was relayed by the ECB last week. "(snip)

    Written by Kathy Lien, Chief Strategist from


    Again this raises the question of just how much dollar value of 'worthless' mortgage backed securities and CDO's are spiralling downward, which leads to a second question as to where banks and hedge funds are going to come up with the money to cover these losses and still meet their other financial obligations. The logical answer of course is 'they're not' ... which in turn sets off yet another round of losses / bankruptcies for banks / retirement funds / gov't entities / pension funds etc. who were depending on those mortgage backed securities and CDO's to provide cash flow and capital gains.

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    Default Re: Wall St sinks as subprime troubles spread

    and the saga continues 'overnight' (from a US point of view anyhow)

    (snip)" The overnight rates banks charge each other to lend in dollars jumped to the highest in six years. The so-called dollar London interbank offered rate rose to 5.86 percent from 5.35 percent yesterday.

    The European Central Bank said it would provide unlimited cash as the fastest increase in overnight Libor since 2004 signaled banks are cutting the supply of money. The U.S. Federal Reserve added $24 billion in temporary reserves to the banking system. Canada's central bank put C$1.64 billion ($1.55 billion) into financial markets yesterday.

    ``This credit crunch will continue to weigh on stocks for a while,'' said Yoshihisa Okamoto, a Tokyo-based fund manager at Mizuho Asset Management Co. with $26 billion in assets. ``We just don't see an end to it and it's prompting everyone to sell.''

    Orix, Skymark

    The Bank of Japan said after the market opened it will add 1 trillion yen of funds to the financial system in its daily money-market operation, the largest same-day operation since June 29. "(snip)

    from


    It would appear that 'fear' is now starting to grip big money investors ... they're trying to sell out of investments which they are now discovering have exposure to mortgage backed security / CDO risk ... the investment managers are being forced to liquidate assets in order to pay off investor withdrawls ... the 'market' for these MBS/CDO assets is now essentially non-existant, forcing investment managers to sell off other fund assets for which there still IS a market ... the forced sale of those other fund assets is directly driving down worldwide stock and bond markets, and indirectly driving up interest rates

    This of course leaves the investment banks in a position of 'bleeding money' to cover investor withdrawls - hence the central bank liquidity injections

    This of course also leaves the investment funds with their 20% or whatever of 'good' assets skimmed out and liquidated to satisfy investor withdrawls, but now leaving only the 'worthless' MBS / CDO assets in the funds - hence the 'freezes' on additional investor withdrawls.
    Last edited by Melonie; 08-10-2007 at 01:48 AM.

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    Default Re: Wall St sinks as subprime troubles spread

    plus another contributor to the liquidity crisis that isn't being publicized ...

    (snip)"By Murray Coleman, MarketWatch
    Last Update: 6:26 PM ET Aug 9, 2007

    SAN FRANCISCO (MarketWatch) -- In the past two weeks, another 13 corporate loan or bond deals have been postponed or reduced, representing slightly less than $43 billion, according to research released Thursday by Baring Asset Management.

    That raises the total number of financing deals pulled from the market since June 22 to 46, representing more than $60 billion, analysts at the firm said. No deals were pulled last year, according to the firm.

    Toby Nangle, a fixed-income manager at Barings, estimated that banks financing leveraged buyouts and management-led buyouts have been left with an estimated $400 billion on their balance sheets.

    "The bond and loan markets know that banks will come knocking sooner or later, asking to refinance loans that they have made to private-equity firms," Nangle said.
    Bankers thought that such loans would only present short-term credit risk, the analyst said.
    "Given their inability to pass this credit risk on to the market, their short-term acquisition finance is increasingly looking like a series of long-term loans," Nangle said. "As a result, many financiers are unwilling to stretch themselves further, and bond market participants can continue to ask for more attractive terms before committing capital to risky corporate loans and bonds."

    "The lack of demand for structured credit, which is ultimately where much of the private-equity funding has previously been ending up, is a key factor and should it fail to return, the conditions in credit markets may become even tougher," Nangle said."(snip)


    In other words, much of the money for the recent binge of private equity buy-outs of former public corporations was borrowed from investment banks, on the premise that they could repackage this corporate debt and resell it after the company was taken private. But now that the subprime credit defaults are forcing a fresh look (i.e. a fresh reassessment of risk and a downgrading of these securities) by the ratings agencies, the investment banks are 'stuck'.

    The investment banks have tied up a significant amount of their own 'cash' to fund what they thought would be short term bridge loans - but instead these are turning out to be long term loans the investment banks will be 'stuck' holding in their own loan portfolios. Since some of the corporations taken private by the private equity vultures may not be able to handle the additional debt load and still remain profitable if ( or more accurately, when ) there is a downturn in the economy, the investment banks themselves are now at risk of taking bankruptcy losses on these loans too.

    At any rate, the investment bank 'cash' which is unintentionally tied up in these unsalable private equity bridge loans is no longer available to the investment banks to use for other purposes. This is contributing to the liquidity problem, since the investment banks must now borrow additional 'cash' from the central banks / other banks instead of being able to use their own 'cash' to meet other commitments, or must go to the bond markets. As the author points out in a roundabout way, both of these options are inflationary in terms of interest rates rising (i.e. higher risks demand higher interest rates), and both of these options are bad for liquidity since they 'consume' short term money and convert it into long term debt (which nobody is eager to buy).


    Time to buy!!
    Well, it certainly appears to be the time to buy something ... put options, gold, a 357 magnum ??

    As the inimitable Red Foxx as character Fred Sanford used to say ... "this is the big one !" With world banking / financial system now starting to show rips and tears around the edges, this time he may be right.

    ~
    Last edited by Melonie; 08-10-2007 at 03:46 AM.

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    Default Re: Wall St sinks as subprime troubles spread

    Are we gonna have another crash?!


    MANY MEN WANTED TO LAY ME DOWN, BUT FEW WANTED TO LIFT ME UP

    -Eartha Kitt

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    Default Re: Wall St sinks as subprime troubles spread

    ^^yes, we're at the risk of a recession. But subprime mortgages make up a small percentage of the mortgage industry, and while everyone is worrying about how foreclosures are going up and early payment defaults are ruining investments, the reality is that the entities that are going to be most impacted are the ones who took advantage of a refinancing boom to make unscrupulous loans. Will it be a crash? Doubtful.

    • Don't buy a home if you can't afford it.
    • If someone promises you that you can afford it, don't listen to them. Only you know if you can afford it.
    • If someone
      says: "I can show you how you can afford it." ask: "with a fixed rate loan?"
    • Before you buy a home, list everything that you would have to spend on that home: taxes, insurance, maintenance, utilities. It's not just a mortgage you have to pay.


    Protect the equity in your home by not cashing it out in a new loan! The people who tell you to protect the equity in your house by getting a loan with them are taking advantage of you. Your equity is not protected if it is a liability -- and that's what a loan is. A liability. Your equity is only protected if it is not unencumbered by a financial lien.

    So if you do have a home loan, and you need to refinance, only refinance for the money you absolutely have to have.

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    Default Re: Wall St sinks as subprime troubles spread

    But we are screwed if China decides to unload a bunch of their investments in American loans.
    Last edited by Danielle_4370; 08-10-2007 at 02:25 PM. Reason: typo

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    Default Re: Wall St sinks as subprime troubles spread

    We'll be fine after the election. The market is going to bounce up and down for a while though. Just save your pennies, pay your bills, and keep your investments diversified. There is always a growth area available!

    "Have you ever been to American wedding? Where is the vodka, where's marinated herring?" - GB
    "And do the cats give a shit? No, they do not. Why? Because they're cats."-from The Onion

    Quote Originally Posted by Mia M
    If a cupcake was tossed at me... well, I'd only be upset if it missed my mouth

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