[NYTr] Banks are in the dark as debt horror story unfolds

[All the News That Doesn't Fit]

sent by Dave Muller (southnews)

Banks are in the dark as debt horror story unfolds

Losses and money supply are different things, of course, but the moral 
is clear: nobody in the markets, including central banks, can say with 
confidence that they know where this crisis will end. In the thriller 
called Sub-prime Slime, the numbers seem to get bigger with each new 
chapter.

How much cash have the Central Banks injected?

- ECB injects 94 bn euros Vs 69 bn after 9/11
- Fed injects $24 bn
- BoJ injects 1 trillion yen
- Australia central bank injects $4.95 bn; double normal ops
- Singapore central bank injects $1.5 bn

                                 ***

The Guardian - Aug 10, 2007
http://business.guardian.co.uk/print/0,,330363231-108725,00.html

Banks are in the dark as debt horror story unfolds

by Nils Pratley

A piece of fine-tuning, said the European Central Bank, which may be
the first time a sum of 95bn (#64.5bn) has been described that way.
More to the point, the amount of cash consumed by European banks
yesterday was also outside the $50bn-$100bn (#25bn-#50bn) range that
Ben Bernanke, chairman of the US Federal Reserve, had identified as the
size of the potential losses from junk lending in the US mortgage
market.

Losses and money supply are different things, of course, but the moral 
is clear: nobody in the markets, including central banks, can say with 
confidence that they know where this crisis will end. In the thriller 
called Sub-prime Slime, the numbers seem to get bigger with each new 
chapter.

The good news yesterday was that the ECB's action had a beneficial 
effect. The cost of borrowing overnight money fell, having soared as 
worried banks had held on to their cash. The ECB could claim it had 
performed its role effectively as a lender of last resort. And, despite 
some scary-looking falls in share prices and another rush towards the 
haven of government bonds, financial markets were shaken not felled.

Yet those happy thoughts don't reflect the mood of many market players 
at the sharp end. Among investors in hedge funds, where we should
expect a few tales of agony to emerge in coming weeks, there was dismay
at the news from BNP Paribas. The French bank said it could not put an
accurate value on three funds it manages. Why? The official explanation
is that there are no prices because there is no trading. A sceptic
would suspect something worse: bad numbers are always harder to add up
than good ones.

Either way, it's alarming. BNP is a grown-up bank. Its technology and 
quantitative models are regarded as among the best in the business. If 
it can't, or won't, put a price on its investments, it's a safe 
assumption that smaller hedge funds are also in the dark.

Over the next week or so those same hedge funds will be reporting their 
performance figures for July. What is an investor to think when news 
comes of, say, a fall of 4%?

The figure may look modest but is it genuine? On what basis is it 
calculated? And what will happen if our investor opts for caution and 
asks for his money to be returned? Will the hedge fund managers declare 
that redemptions are forbidden at this difficult time?

That's what BNP did with its three funds. A freeze is legitimate - 
non-redemption clauses are common with hedge funds - but it is terrible 
for wider confidence. It encourages the idea that the time to get out
is while the door is still open. When too many people think that way,
panic can follow.

Our investor might also listen to a few voices at the coalface, like 
Alan Ruskin's. He is chief international strategist at RBS Greenwich 
Capital, the part of Royal Bank of Scotland that deals in US 
mortgage-backed securities, and he sounds gloomy.

"Problems of appropriately marking to market [in other words, pricing 
investments accurately] are likely to be systemic, at least in the 
credit derivatives area," he said.

"If Ben Bernanke was right in alluding to sub-prime losses at 
$50bn-$100bn, then only a small percentage appears to have surfaced so 
far, and since he made those remarks, losses have likely extended
across a much broader credit universe than sub-prime."

He could have added that the slime has reached unlikely places. 
Yesterday Dutch merchant bank NIBC was the latest obscure continental 
European lender to confess. It has notched up losses of 137m (#93m) on 
US asset-backed securities and warned the figure would rise.

Why was a mid-sized Dutch bank playing in the US mortgage market in the 
first place? As with German bank IKB, which was supposed to be lending 
to local corporations, a picture is emerging of financial naivety. US 
banks wanted to export their toxic waste, and the Europeans bought the 
stuff.

How much have they got? There is no way of knowing at the moment. Even 
IKB hasn't quantified the scale of its crisis, a week after it admitted 
it had a problem. The vacuum will be filled by rumour, and yesterday's 
gossip was that a large, frontline European bank has caught a nasty
dose of sub-prime.

Only time will tell. The optimists hope that markets will calm down
once senior bankers return from their August holidays and remind the
world that the global economy is still in decent shape. It's also true
that a few institutions are building war chests to pounce on
opportunities. French bank Axa and US private equity house Blue
Mountain are two that are said to be setting up such "defensive" funds.
There will be big winners in this story.

At the moment, though, this clever money is sitting in the wings. It 
looks the best place to be.


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