the traditional buyers of commercial paper will stop taking it(Z

Bulls are in the shit	followtrend	NEW 9/8/2007 6:11:43 PM
September 9, 2007 John Waples, Business Editor JOURNALISTSare often accused of sensationalising things – but make no mistake themayhem we are witnessing in the money markets is for real. Inthe past two days I have spoken to five of Britain's most seniorbankers and they are taking the situation very seriously. They have notseen anything like it for at least 20 years and it is far bigger thanthe fall-out that followed the collapse of the hedge fund Long TermCapital Management in 1998. To the man in the street, the crisisseems a long way away, and it is – for now. It is intangible, opaqueand difficult to understand. But the nub of the problem is that banksare simply refusing to lend. The reason is that some $113 billion ofcommercial paper is about to be refinanced in the money markets andnobody knows how toxic this paper is and whether it is exposed to theslump in America's sub-prime mortgage market. To make matters worse, everyone has lost confidence in the agencies that put a rating on this paper. Itis possible this log jam could be sorted out within three weeks butmost people I have spoken to say it will take longer than that. As wereport, banks are hoarding cash. They are protecting themselves againstthe high possibility that insurance and pension funds – the traditionalbuyers of commercial paper – will stop taking it. With that majorsource of liquidity removed, they may have to take a higher percentageof this paper on to their own books. If the crisis continues, itwill stop banks doing what they are designed to do – keep the economygoing. This could ultimately make it hard for businesses to securelong-term funding. The Bank of England is acutely aware of this and maystep in with more emergency funding. What is so odd about thisis that the banks themselves are not facing huge hits from taking thispaper in-house. Most of it is nontoxic. Yes, there will be someprovisions, but what this is about is a lack of liquidity, the likes ofwhich we have probably never seen before in Britain. __________________ "Civilizations die from suicide, not murder. -Arnold J. Toynbee, A Study of History (1934-1961)
RE: Bulls are in the shit	followtrend	NEW 9/8/2007 6:14:26 PM
From The Sunday Times September 9, 2007 David Smith and John Waples LEADINGbankers are warning of the worst crisis in the money markets for 20years, which will come to a head this week when $113 billion (£57billion) of commercial paper – market IOUs – comes up for refinancing. Thishuge refinancing, mainly through London, exceeds the $100 billion thatbecame due in mid-August, and which sparked the most serious phase inthe money-market crisis, which has seen banks scrambling for funds andmarket interest rates rising sharply. “This is a serious pressurepoint,” said one leading banker. Another senior executive of oneof Britain's top five retail banks said: “These are the worstconditions I have seen in money markets for 20 years”. The hugeamount of commercial paper becoming due is the hangover from the crisisin credit markets that began with American sub-prime mortgages. Many ofthe off-balance-sheet structured investment vehicles (SIVs) set up bythe banks were borrowed in the form of asset-backed commercial paper. Now,even if they succeed in rolling over some of this paper this week, theywill eventually be forced to take some of it – much of which is ofquestionable value – onto their balance sheets. To meet this potentialliability, banks are hoarding cash and have stopped lending to eachother. This has created a liquidity freeze. “Asset-backedcommercial paper is rolling off every day and the banks are taking moreand more onto their balance sheets, which is using up capital,” saidPaul Mortimer-Lee, global head of market economics at BNP Paribas inLondon. “It is both a liquidity and a capital crisis.” His viewwas supported by a top banker who said: “Even the very solid banks thatwere not at the sharp end are hoarding liquidity to ensure they canfund the rollover.” The Bank of England, which last weekannounced the injection of up to £4.4 billion of extra liquidity intothe money markets for each of the next three weeks, is policing theproblem, bankers say, but has no plans to change its tactics, whichhave drawn criticism. Its first significant response to thecrisis came only a few days ago, after weeks in which the EuropeanCentral Bank and Federal Reserve had injected tens of billions of eurosand dollars in an effort to steady the markets. But the Bank'ssupporters said the criticism was unjustified, and that it had beenright to limit its action. They pointed out that, properly measured,the rise in sterling money-market rates had been similar to that fordollar rates. The prospect of serious market indigestion frommaturing commercial paper is not the only headache for the banks.Globally, they have $380 billion of loans and bonds to be laid off fromleveraged buyouts and other private-equity deals at a time when themarkets have shifted sharply against them. The crisis has led to a big change in interest-rate expectations. Afterthe Bank's quarterly inflation report a month ago, most economists werelooking for a further hike in Bank rate to 6%. Now, according to asurvey by Ideaglobal.com, the financial-research company, only 36%think the next rate move will be up, while 64% are looking for the nextmove to be down. Most do not expect that to happen until next year, although economists say the situation is changing rapidly. TheFederal Reserve is widely expected to begin the process of reversingthe recent rise in global interest rates when its cuts the Fed Fundsrate on September 18 in response to the market crisis and weak Americanjobs data. Last Wednesday, the Bank and the Financial ServicesAuthority called a meeting with Britain's top banks to hear how bad theliquidity freeze is. In the short term, the credit crunch isforcing up the cost of borrowing and the Bank is concerned that thiscould spill over into the wider economy, making it difficult forbusinesses to raise long-term finance. What has compounded theproblem is that nobody yet knows who holds the commercial paper that isexposed to the US sub-prime mortgage market and has been dubbed astoxic. Britain's big banks have varying degrees of exposure but it isnot seen as a huge problem. One banker said: “We don't know yet what wecould be holding on our balance sheet in one week or three months'time. No bank will escape some impact on its profit-and-loss acount.But will it be a mega number resulting in a material hole in itsbalance sheet? I doubt it.” Commercial paper is typically soakedup by pension and insurance funds. But until they are able to work outtheir exposure, many of them are refusing to buy any more. It is thisbuying strike that has created the liquidity freeze. Another senior banker said: “What nobody knows is whether this will spill over into the wider economy”. Thecrisis is having a huge impact on the way banks conduct their business.Northern Rock, the troubled bank, is facing a battle to raise up to £3billion in funding it needs from the debt markets in the next threemonths. Northern Rock has been particularly vulnerable becauseit relies on the credit markets for about 70% of the funds it needs tofinance its aggressive mortgage lending. Some debt analysts believethat the bank may need to raise up to £8 billion if it is to sustainits ambitious targets and take mortgages that have been written severalmonths ago off its balance sheet. There have also beensuggestions that the funding pressures could force Northern Rock toissue a second profit warning. In June the bank said that £180m to£200m in income had been wiped out after it failed to pass onhigher-than-expected borrowing costs to customers rapidly enough. Other banks, including Anglo Irish, another big user of securitisations, also face a credit squeeze. Therefinancing of the commercial paper is expected to start tomorrow andend on September 20. In that short period the City is braced for hugemarket volatility. The big high-street banks are exposed tobillions of pounds of commercial paper, a lot of which is high quality.But they will still need the capital to take it back onto their balancesheets. When the markets recover, analysts say there will have to be apost mortem over the different ways that America's Federal Reserve, theEuropean Central Bank and the Bank of England acted during the crisis.The rating agencies are already being investigated and are expected tobe severely criticised. __________________ "Civilizations die from suicide, not murder. -Arnold J. Toynbee, A Study of History (1934-1961)