Britain
Financial stocks were the biggest fallers in the FTSE 100 yesterday as
investors, spooked by the prospect of more sub-prime pain and a further
crunch in the credit markets, dumped shares in banks and fund managers.
Man Group led the plunge after the world’s biggest listed hedge fund manager
delayed the float of a fund on the New York Stock Exchange. It decided to
hold off its attempt to raise an expected $50 million (£25 million) to put
into its Man Dual Absolute fund until investor confidence returned. Man
shares closed down more than 9 per cent to 479p on the news.
Shares in HSBC, Barclays, HBOS, Lloyds TSB, Northern Rock and Standard
Chartered also dropped, in part because investors were concerned that
wholesale loan market illiquidity would affect the banks’ ability to lend.
London’s main stock market yesterday suffered its biggest loss in more than
seven years. The FTSE 100 saw £63 billion wiped off its value, closing down
232.9 points to 6038.3, Over 36 hours central banks pumped $323 billion into
the interbank money markets after a clamour for cash by commercial banks
forced up the cost of borrowing. But the Bank of England bucked the trend
yesterday, remaining silent. Mervyn King, the Govenor of the Bank of
England, said this week that he would not cut rates to help careless lenders.
One hedge fund manager said the houses that ran long-short funds were calm,
treating yesterday’s falls as “business as usual”, but managers of
quantitative funds were jumpy because the computer models that dictated
their strategies struggled to predict extreme market movements. He said it
would take more than a month to see how badly the funds were affected.
“We need to see if there are going to be redemptions in those funds or if they
face margin calls,” he said. “If that happens, we’ll see more forced sellers
get into a self-fulfilling downward spiral.”
Christine Seib
Europe
Europe remained the nerve centre of global panic over the sub-prime crisis
yesterday, after the European Central Bank’s injection of a further €61.05
billion (£41.4 billion) into the money markets.
The ECB’s move, which came a day after it handed banks an unprecedented €94.84
billion in 24-hour loans to avert a credit crunch, was described by
economists as a double-edged sword. They said the latest injection of funds,
which must be repaid on Monday, helped to avoid a meltdown, but fuelled the
angst gripping Europe.
“They were right to do this because there was potentially a problem of
liquidity,” said Jean-Louis Mourier, an economist at Aurel Leven in Paris.
“However, it is true that it probably made people more worried.”
Marc Ostwald, a strategist at Insigner de Beaufort in London, said the ECB had
to take action. “They were definitely right. The intervention was meant to
restore order to money markets, which is imperative, and it helps the ECB to
find out just how disorderly things are. If it had done nothing, it would
have been criticised.”
A total of 62 banks bid for €110 billion. The ECB refused requests for a
further €49 billion.
Analysts said the Frankfurt-based institution had been forced to use greater
muscle than its counterparts elsewhere because the sense of turmoil is more
acute in Europe. This was not necessarily because European banks were more
exposed to bad debt in the US, but because they had been the first to own up
to their difficulties.
German banks are struggling under the weight of bad debt. Allianz, the
insurance giant, also admitted €1.7 billion of exposure yesterday.
Prosecutors are investigating IKB Industriebank after losses caused by its
exposure in the US sub-prime markets meant it had to be rescued by the
state-owned development bank, KfW. Two formal complaints were made over
IKB’s alleged delay in disclosing the extent of its difficulties.
Adam Sage
United States
“There’s $50 to $100 billion worth of dead mortgages out there, they’re all at
the bottom of the ocean and what we are seeing in the market now is that
they are all floating up to the surface. It is going to be some time before
the market can work out the impact of those dead mortgages,” said Dr Kevin
Logan, senior market economist at Dresdner Kleinwort in New York.
Dresdner is not alone in worrying about the impact of sub-prime mortgage
defaults on the major banks and fund managers.
So far, Wall Street has seen only a handful of casualties – the closure of two
hedge funds at Bear Stearns, fears of large losses at a Goldman Sachs hedge
fund and then a string of sub-prime mortgage lenders filing for Chapter 11
bankruptcies. Yesterday, Country-Wide Financial, America’s biggest mortgage
lender, saw its shares slide 7 per cent after stating that “unprecedented
disruptions” in the debt markets could get worse. Washington Mutual shares
fell 4 per cent after it expressed concerns about its future liquidity.
This is relatively small fry. Economists are waiting for the first big
announcement of a liquidity crisis at a major bank, or a major writedown
from a big fund manager. Until then, economists claim, the Fed is unlikely
to cut interest rates.
Mike Lenhoff, chief strategist at Brewin Dophin in London, said: “Very real
distress would have to be visible before the Fed cut rates. That would have
to be a big bank warning about liquidity. A hedge fund in trouble probably
wouldn’t do it.”
Chris Whalen at Institutional Risk Analytics said: “Where is everyone else? A
lot of funds had the same asset allocation as Bear Stearns, so where are the
others?”
Gone is talk of inflation and now the chat is about an economic slow-down. Mr
Lenhoff said : “Two days of this sort of behaviour can make all the
difference. The risk is growing about the risk of a recession for the US.”
Suzy Jagger
Asia
“The Asian story is still fantastic. It’s markets have gone ugly, ugly, ugly,”
said one senior dealer at Mitsubishi UFJ.
“This was a week of panic. What none of these funds want is for next week to
be the week of redemptions.”
Quality stocks, he said, are being dumped in what amounts to dozens of highly
leveraged hedge-fund fire sales.
The 1987 crash, the 1997 Asian financial crisis and the current 2007 wobble
create a disturbing pattern of trouble.
Yesterday of all days, a typhoon closed Hong Kong markets early and prompted
emergency position-closing.
Much of the Japan-based destruction was wrought by a deadly combination of
self-confessed ignorance and some alarming fund flows. Most investors have
little idea how extensive the sub-prime “blast-zone” will be.
For the dealing floors of Tokyo, the ultimate madness yesterday was the
sell-off of Nintendo, which until this week had been among the most beloved
stocks on the exchange.
For years, the games giant has been sitting on a growing pile of income. But
how, the market wondered, had it been investing that cash? What if it had
taken a punt on assets with US sub-prime exposure? Nintendo was fending off
calls from analysts, but the assurances came too late and the shares joined
the rest of the bourse in freefall.
Leo Lewis
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GLODY KALAMBAY, london, UK