Banks 'set to call in a swathe of loans'
By Ambrose Evans-Pritchard
Last Updated: 7:25am BST 26/06/2007

The United States faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, according to a report by Lombard Street Research.

Bear Stearns headquarters in New York

The group said the fast-moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations known as CDOs.

"Excess liquidity in the global system will be slashed," it said. "Banks' capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the US hard landing."

Charles Dumas, the group's global strategist, said the failed auction of assets seized from one of the Bear Stearns funds by Merrill Lynch had revealed the dark secret of the CDO debt market. The sale had to be called off after buyers took just $200m of the $850m mix.

"The banks were not prepared to bid over 85pc of face value for CDOs rated "A" or better," he said.

"God knows how low the price would have dropped if they had kept on going. We hear buyers were lobbing bids at just 30pc.

"We don't know what the value of this debt is because the investment banks shut down the market in a cover-up so that nobody would know. There is $750bn of dubious paper out there in the form of CDOs held by banks that have a total capitalisation of $850bn."

advertisementUS property writer Paul Muolo described the Bearn Stearns crisis as the “subprime Chernobyl�, saying the bank had created a “cone of silence�.

Abandoned by fellow banks, Bear Stearns has now put up $3.2bn of its own money to rescue one of the funds, a quarter of its capital.

This is the biggest bail-out since the Long-Term Capital Management crisis in 1998, which Bear Stearns refused to join at the time. Bear Stearns is now alone, a case of rough justice being served.

Lombard Street’s warning comes as fresh data from the US National Association of Realtors shows that the glut of unsold homes reached a record of 8.9 months supply in May. Sales of existing homes slid to an annual rate of 5.99m.

The median price fell for the 10th month in a row to $223,700, down almost 14pc from its peak in April 2006. This is the steepest drop since the 1930s.

The Mortgage Lender Implode-Meter that tracks the US housing markets claims that 86 major lenders have gone bankrupt or shut their doors since the crash began.

The latest are Aegis Lending, Oak Street Mortgage and The Mortgage Warehouse.

“There isn’t a recovery about to happen,� said Ara Hovanian, head of the building group Hovanian Enterprise.

Nouriel Roubini, economics professor at New York University, said there were now concerns about “systemic risk fall-out� from the Bear Stearns debacle as investors look more closely at the real value of CDOs.

“These highly illiquid securities have been priced so far on unrealistic and distorted credit ratings as the ratings industry has been complicit,� he said.

“They have not been rerated in a way that is consistent with rising subprime default rates. “That is why Wall Street is in a panic. “Losses will be massive once these assets are correctly priced to market.�

Lombard Street said the Bear Stearns fiasco was the tip of the iceberg. The greatest risk lies in the “toxic tranches� of lower grade securities held by the banks.

Much-trumpeted claims that banks had shifted off the riskiest credit exposure on to the asset markets was “largely a fiction�, said Mr Dumas

. The worst of the US property crisis has yet to hit since there is an overhang of $2,000bn of mortgages with adjustable rates which have yet to be reset. Many borrowers could see payments jump by half, or even double.

At the same time, a spike in 10-year US bond yields by 0.65 percentage points over the last six weeks has drastically repriced the cost of fixed mortgages, knocking away a key prop for the US housing market.

“With defaults at their highest in the 37 years that records have been kept, it could be a long hot summer,� said Mr Dumas.

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(BN) Fed's Checki Says National Reserve Funds May Pose New Risks

Fed's Checki Says National Reserve Funds May Pose New Risks
2007-05-31 10:27 (New York)

By Jacob Greber
May 31 (Bloomberg) -- National governments and central banks
may pose new risks to global financial markets as they seek
greater returns on their record holdings, said New York Federal
Reserve Executive Vice President Terrence Checki.
``The growing interest in earning better returns on reserve
assets may signal reduced caution going forward,'' Checki told a
conference in Athens today. ``Capital flows from the emerging
world could play an important new role in how future episodes of
stress in the financial system originate.''
Central banks are diversifying their $5 trillion of foreign-
exchange reserves away from traditional government bonds, bank
reports show. Governments, particularly in Asia and oil-producing
regions, are also pouring funds into state-controlled investment
companies to seek greater returns. Those assets have climbed to
$2.5 trillion, according to research by Morgan Stanley analysts.
Checki, who heads the New York Fed's emerging markets and
international affairs division, said recent stability in global
markets ``may contain the seeds of its own undoing.'' Long-term
trends ``are inherently dangerous'' because they can ``make
people forget what different environments look like.''
``This makes reversals all the more sudden, powerful and
surprising,'' Checki said.
The New York Fed official's comments reflect concern among
some central bankers that low borrowing costs worldwide may spur
some investors to pay too much for assets given their risk.
Emerging-market and junk-rated bond premiums compared with
benchmark securities slid to record lows this month.

Premiums Shrink

The extra yield offered by emerging-market bonds compared
with benchmark U.S. Treasury securities dropped to a record 152.8
basis points on May 23, according to the JPMorgan Chase & Co.
EMBI+ index. The so-called spread was 158.6 basis points
yesterday.
Risk premiums on U.S. corporate bonds rated below investment
grade narrowed to 242 basis points on May 29, based on Merrill
Lynch & Co.'s high-yield index, which has tracked yield premiums
since the end of 1996. The spread is half the average of about 5
percentage points over the past five years.
Checki made the comments in front of bankers attending a
meeting of the International Institute of Finance, which today
published a report saying net direct investment in emerging
markets will rise 16 percent this year as mergers boom and demand
for commodities soars.
Deutsche Bank AG Chief Executive Officer Josef Ackermann
said there has been ``a lowering of investing standards in some
markets'' amid surging liquidity.

--With reporting by Harry Papachristou and Gabi Thesing in
Athens. Editor: Hertling (cxa)

Tokyo Margin Currency Trading Volume Exceeds 100 Trillion Yen

By Kosuke Goto

May 23 (Bloomberg) -- Trading of currencies in Japan using borrowed funds rose 41 percent in the first quarter to 109 trillion yen ($896 billion), exceeding 100 trillion yen for the first time, the Financial Futures Association of Japan said.

Margin trading surged in the three months ended March 31 from the fourth quarter, a spokesman at the association, who asked not to be identified, said today. The increase highlights the popularity of currency investment among Japanese individuals, said Koji Fukaya, senior currency strategist in Tokyo at Deutsche Securities.

``Foreign-exchange margin trading volume is soaring,'' said Fukaya, whose firm is a member of the association. ``It is contributing to the yen carry trade,'' in which investors borrow Japan's currency and invest in higher-yielding overseas assets.

The yen has fallen against all of the 16 most-active currencies in the past year, as the Bank of Japan signaled it may keep its benchmark interest rate of 0.5 percent unchanged in coming months. The association's figures reflect trading by individuals rather than institutions.

The yen dropped to a three-month low of 121.77 against the dollar before trading at 121.68 at 7:14 a.m. in London from 121.56 late in New York yesterday. It also fell to 163.73 per euro from 163.48. The currency may drop to as low as 123 versus the dollar and 165 per euro by the end of June, Fukaya said.

Low Volatility

Japanese retail investors are also helping to moderate currency swings by buying foreign currencies on dips, said Fukaya. Volatility on one-month yen options fell to 6.30 percent today, down from 7.50 a month ago. Lower volatility implies smaller exchange-rate fluctuation risk, encouraging investors to add to yen carry trades.

``Japanese individuals' trading volume accounts for 20 percent to 30 percent of the interbank foreign-exchange market in the Tokyo time zone,'' Fukaya said. ``They are also active in London time after going home. They are becoming a rival to be reckoned with for institutional investors.''

China's day-traders look for 'black horses'

By Geoff Dyer in ShanghaiTue May 22, 2:05 PM ET

The thousands of ordinary Chinese who are signing up each day to trade shares are not too concerned about the conventional ways of valuing a stock, but they need to know the difference between a ghost and a black horse.

Chinese have combined a traditional delight in word-play with their new-found passion for stocks to create a rich supply of colloquial jargon for investing that is bandied around brokerage offices.

"Ghost shares" are highly risky, but "black horses" have beaten expectations. Buying cheap to sell high later is known as "fighting for the hat", while selling at a loss to avoid further losses is "meat slicing". Investors who think a piece of news will boost prices claim to be "lifting the sedan chair".

When a fund manager was sacked last week for allegedly manipulating share prices, websites hummed with talk of "rat investors", the term for insider traders.

There is even a Chinese phrase that could define the current boom. On top of bulls and bears there is the "deer market", when large groups of amateur, short-term speculators cause markets to move in erratic jolts.

The jargon is being quickly learned by the long lines of new day-traders who have helped push share prices up 52 per cent this year - on top of last year's 130 per cent rise - but who are making the market look increasingly over-valued.

Despite an interest rate rise on Friday aimed at cooling the market, retail investors ignored the messages from Beijing and opened 287,000 trading accounts on Monday, 35,000 more than on Friday.

The explosion in day-trading has created some unintended consequences in Shanghai in the form of unwashed dinner dishes, badly ironed shirts and dusty floors. In recent weeks the city has developed a shortage of ayis, the domestic helpers who do chores in the homes of middle-class families, because some have found more gainful employment playing the market.

Sheng Min, who runs a Shanghai agency that recruits ayis, says his company started to face problems finding new domestic helpers in April because of the stock market fever and now has 50 per cent fewer women on its books than usual.

"We occasionally receive phone calls from employers complaining about their ayis," he says. "Some of them seem to be more interested in chatting about stocks with their friends than working."

Zhang Wei works most weekday mornings in several houses around the city, but for the last few weeks she has been visiting a brokerage in the Hongkou district of Shanghai in the afternoons. "Last month I made almost half my salary from investing," she says.

With an eye on the new day-traders, a man placed an advert on the Taobao auction site last week selling signed doctors' certificates for one month off work for Rmb100 ($13, EU9.70, £6.60). The advert has since been removed.

Cynics would say speculator-ayis are a sure sign of a bubble, but if everyone continues buying, prices will keep going up - even in a deer market.

Rothko, Bacon Set Records at `Crazy' Sotheby's Sale (Update1)
2007-05-16 03:19 (New York)

(Adds location of sale in second paragraph.)

By Lindsay Pollock and Philip Boroff
May 16 (Bloomberg) -- A Francis Bacon painting smashed the
auction record for postwar art last night in New York, fetching
$52.7 million. Its reign lasted just 10 minutes, before being
trumped by a Mark Rothko work that went for $72.8 million.
Rothko's hot-hued ``White Center (Yellow, Pink and Lavender
on Rose),'' from seller David Rockefeller Sr., and Bacon's fierce
crouching Pope, ``Study From Innocent X,'' helped propel the 74-
lot auction at Sotheby's to a record $254.9 million. Before
tonight, the highest auction price for an artwork from the period
was a $27.1 million Willem de Kooning in November.
``Money has no meaning,'' said Angela Westwater of New York
gallery Sperone Westwater, after the Rothko sold. ``It's a good
work, but the whole marketplace is crazy.''
Rockefeller, 91, calmly watched the saleroom from a glass-
enclosed skybox as five telephone bidders competed for his
painting. Below sat 700 swells, including Calvin Klein, hotelier
Ian Schrager and former Sotheby's Chairman Alfred Taubman.
Rockefeller has said he will donate the proceeds of the
Rothko sale to charity. ``I am very pleased that it did so
well,'' he said in a statement. ``I'm sorry to see it go.''
Bacon's pope image also sold to a telephone bidder. The 1962
work, from the artist's series of papal portraits, was estimated
to fetch more than $30 million. Meshulam Riklis bought the
painting in 1975 and gave it to his daughter, New Yorker Mona
Ackerman, who was the seller.

Prince, Rauschenberg

The evening's total, and last week's $619.7 million in sales
of Impressionist and modern art by Sotheby's and Christie's
International in New York, show the market continues to boom.
Prices include a buyer's premium of 20 percent of the hammer
price up to $500,000, and 12 percent on the rest.
Last night's sale, more electric than either of last week's,
set 15 artist records, including for Richard Prince, Robert
Rauschenberg, Cecily Brown, John Baldessari and Morris Louis. The
previous high of $239.7 million was set in November, 2006, at
Christie's International.
Still, not every artist was in demand. None of the three
Jackson Pollock drip paintings offered drew any bids.
Mexican art collector and Metropolitan Museum of Art trustee
Paula Cussi was identified by two dealers as the seller of the
priciest Pollock. Cussi is the ex-wife of the late Emilio
Azcarraga Milmo, former chairman of Grupo Televisa SA.
``Number 16, 1949,'' a cascade of reds, yellows, greens and
blacks, was estimated to sell for as much as $25 million. The
painting was on paper, mounted on Masonite. Sotheby's disclosed
``an ownership interest'' it declined to explain.

Skeletal Grimace

The Israel Museum in Jerusalem sold a powerful 1981 Jean-
Michel Basquiat painting of a grimacing skeletal figure for an
artist record of $14.6 million, nearly double the high estimate.
Proceeds will go to a contemporary art fund at the museum.
Rothko, a major Abstract Expressionist, painted ``White
Center,'' in July 1950, soon after he developed his signature
floating pools of color. ``White Center'' was influenced by a
trip to Italy, where the artist observed the dry, bright pigments
used by Renaissance fresco master Giotto, according to Bonnie
Clearwater, author of ``The Rothko Book'' and director of the
Museum of Contemporary Art in North Miami, Florida.
``Rothko wanted painting to be miraculous for the viewer and
for himself,'' Clearwater said. ``They weren't just colors on a
canvas but a mirror of modern fragmented times.''
``White Center'' had a presale estimate of more than $40
million, nearly double the artist's previous auction record.
Rockefeller acquired the painting in 1960 for $8,500 (about
$59,000 in current dollars) on the advice of Dorothy Miller,
former curator of New York's Museum of Modern Art.

Rockefeller Allure

``I had gotten a Rothko for him,'' Miller told an
interviewer in 1971. ``One of the early ones with lots of color,
a beautiful one. He wanted to have it in his office.''
The painting had hung in Rockefeller's office at Chase
Manhattan Bank along with a Chinese statue that had belonged to
his mother, Abby Aldrich Rockefeller, one of MoMA's founders.
Rockefeller was the bank's chairman.
The Rockefeller name was a big factor in the success of the
sale, dealers said.
``While it's a spectacular painting, it's clear the allure
of having David Rockefeller's painting in your house is going way
beyond what you might otherwise consider reasonable,'' said New
York dealer Marc Glimcher of PaceWildenstein gallery, which
represents the Rothko estate. ``That kind of thing is becoming
irresistible to people.''

Another Chance

Disappointed bidders still have an opportunity to buy a
Rothko this week. Christie's postwar and contemporary art auction
today includes two.
A red and burgundy 1961 work ``Untitled'' has an estimate of
as much as $18 million. A pink and orange 1954 canvas, also
``Untitled,'' may fetch $25 million, according to Christie's. The
seller, identified in the catalog as ``a distinguished private
collector,'' is said by three dealers to be art dealer and former
Goldman, Sachs & Co. partner Robert Mnuchin of L & M Arts.
Mnuchin bought the painting in 1980 for his private collection.