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Banks Say Worst Crisis In 20 Years!

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Worst crisis for 20 years, say banksDavid Smith and John Waples

LEADING bankers are warning of the worst crisis in the money markets for 20 years, which will come to a head this week when $113 billion (£57 billion) of commercial paper – market IOUs – comes up for refinancing.

This huge refinancing, mainly through London, exceeds the $100 billion that became due in mid-August, and which sparked the most serious phase in the money-market crisis, which has seen banks scrambling for funds and market interest rates rising sharply. “This is a serious pressure point,” said one leading banker.

Another senior executive of one of Britain’s top five retail banks said: “These are the worst conditions I have seen in money markets for 20 years”.

The huge amount of commercial paper becoming due is the hangover from the crisis in credit markets that began with American sub-prime mortgages. Many of the off-balance-sheet structured investment vehicles (SIVs) set up by the banks were borrowed in the form of asset-backed commercial paper.

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Now, even if they succeed in rolling over some of this paper this week, they will eventually be forced to take some of it – much of which is of questionable value – onto their balance sheets. To meet this potential liability, banks are hoarding cash and have stopped lending to each other. This has created a liquidity freeze.

“Asset-backed commercial paper is rolling off every day and the banks are taking more and more onto their balance sheets, which is using up capital,” said Paul Mortimer-Lee, global head of market economics at BNP Paribas in London. “It is both a liquidity and a capital crisis.”

His view was supported by a top banker who said: “Even the very solid banks that were not at the sharp end are hoarding liquidity to ensure they can fund the rollover.”

The Bank of England, which last week announced the injection of up to £4.4 billion of extra liquidity into the money markets for each of the next three weeks, is policing the problem, bankers say, but has no plans to change its tactics, which have drawn criticism.

Its first significant response to the crisis came only a few days ago, after weeks in which the European Central Bank and Federal Reserve had injected tens of billions of euros and dollars in an effort to steady the markets. But the Bank’s supporters said the criticism was unjustified, and that it had been right to limit its action. They pointed out that, properly measured, the rise in sterling money-market rates had been similar to that for dollar rates.

The prospect of serious market indigestion from maturing commercial paper is not the only headache for the banks. Globally, they have $380 billion of loans and bonds to be laid off from leveraged buyouts and other private-equity deals at a time when the markets have shifted sharply against them.

The crisis has led to a big change in interest-rate expectations.

After the Bank’s quarterly inflation report a month ago, most economists were looking for a further hike in Bank rate to 6%. Now, according to a survey by Ideaglobal.com, the financial-research company, only 36% think the next rate move will be up, while 64% are looking for the next move to be down.

Most do not expect that to happen until next year, although economists say the situation is changing rapidly.

The Federal Reserve is widely expected to begin the process of reversing the recent rise in global interest rates when its cuts the Fed Funds rate on September 18 in response to the market crisis and weak American jobs data.

Last Wednesday, the Bank and the Financial Services Authority called a meeting with Britain’s top banks to hear how bad the liquidity freeze is.

In the short term, the credit crunch is forcing up the cost of borrowing and the Bank is concerned that this could spill over into the wider economy, making it difficult for businesses to raise long-term finance.

What has compounded the problem is that nobody yet knows who holds the commercial paper that is exposed to the US sub-prime mortgage market and has been dubbed as toxic. Britain’s big banks have varying degrees of exposure but it is not seen as a huge problem. One banker said: “We don’t know yet what we could 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 its balance sheet? I doubt it.”

Commercial paper is typically soaked up by pension and insurance funds. But until they are able to work out their exposure, many of them are refusing to buy any more. It is this buying strike that has created the liquidity freeze.

Another senior banker said: “What nobody knows is whether this will spill over into the wider economy”.

The crisis 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 £3 billion in funding it needs from the debt markets in the next three months.

Northern Rock has been particularly vulnerable because it relies on the credit markets for about 70% of the funds it needs to finance its aggressive mortgage lending. Some debt analysts believe that the bank may need to raise up to £8 billion if it is to sustain its ambitious targets and take mortgages that have been written several months ago off its balance sheet.

There have also been suggestions that the funding pressures could force Northern Rock to issue a second profit warning. In June the bank said that £180m to £200m in income had been wiped out after it failed to pass on higher-than-expected borrowing costs to customers rapidly enough.

Other banks, including Anglo Irish, another big user of securitisations, also face a credit squeeze.

The refinancing of the commercial paper is expected to start tomorrow and end on September 20. In that short period the City is braced for huge market volatility.

The big high-street banks are exposed to billions 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 balance sheets. When the markets recover, analysts say there will have to be a post mortem over the different ways that America’s Federal Reserve, the European Central Bank and the Bank of England acted during the crisis. The rating agencies are already being investigated and are expected to be severely criticised.

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I don't really understand why the banks are in such trouble - surely if they are sure they are not that exposed, they can simply borrow the money somehow?

I read on singingpig that the BoE are insisting this is due to counterparty risk while the banks are not. If this is true, why would the BoE not unserstand/believe this?

After reading about this for the last week, I'm still confused!

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The Times seems to have become a bear party in the last month - wonder why?

Clarification: Yes I know there's good reason to be bearish, but why the times more than other papers?

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I don't really understand why the banks are in such trouble - surely if they are sure they are not that exposed, they can simply borrow the money somehow?

I read on singingpig that the BoE are insisting this is due to counterparty risk while the banks are not. If this is true, why would the BoE not unserstand/believe this?

After reading about this for the last week, I'm still confused!

http://business.timesonline.co.uk/tol/busi...icle2412839.ece

On Wednesday morning, at the gleaming headquarters of the Financial Services Authority in London’s Canary Wharf, the men who will determine whether Britain’s economy can emerge unscathed from the crisis in financial markets met to review the situation.

Paul Tucker, the Bank of England’s executive director responsible for markets, led a team of Bank officials. Sir Cal-lum McCarthy, chairman of the FSA, and Hector Sants, its recently-appointed chief executive, led for the hosts.

Facing them were senior figures from the top banks, including Stephen Green, HSBC’s executive chairman, Johnny Cameron, chief executive for corporate markets at Royal Bank of Scotland, Bob Diamond, chief executive of Bar-clays Capital, Eric Daniels, chief executive at Lloyds TSB, and Lindsay Mackay, HBOS’s head of treasury.

In the exchanges that followed, the agenda was clear. The Bank and the FSA wanted to know how serious the liquidity squeeze was and what the likely knock-on effects were for the real economy.

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The Times seems to have become a bear party in the last month - wonder why?

Clarification: Yes I know there's good reason to be bearish, but why the times more than other papers?

Telegraph are Bearish as well.

http://www.telegraph.co.uk/money/main.jhtm.../09/ccom109.xml

After weeks of fearing the worst, the City will find out what the credit crunch really means on Tuesday. That's when the biggest backlog of debt in modern financial history begins hitting the banks like a steam train.

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Worst crisis for 20 years, say banksDavid Smith and John Waples

LEADING bankers are warning of the worst crisis in the money markets for 20 years, which will come to a head this week when $113 billion (£57 billion) of commercial paper – market IOUs – comes up for refinancing.

Banks lend money all the time to each other, why is all coming to a head this week, so what an IOU expires and needs refinancing, big deal, my car insurance is due this week, so is my house insurance, my council tax and gas bill, I have two options, pay for it with cash I have in reserve or borrow it and spread it over 6 months. Is this article saying that banks are so ****king stupid that they haven't prepared for it, honestly who writes this sh**e.

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Banks lend money all the time to each other, why is all coming to a head this week, so what an IOU expires and needs refinancing, big deal, my car insurance is due this week, so is my house insurance, my council tax and gas bill, I have two options, pay for it with cash I have in reserve or borrow it and spread it over 6 months. Is this article saying that banks are so ****king stupid that they haven't prepared for it, honestly who writes this sh**e.

My understanding is that they (in general) may indeed not have sufficient reserves to take these debts back on balance sheet if they cannot refinance them. Isn't that the whole point? Hence the inherent dangers with shifting these debts off the balance sheet in the first place.

What I don't fully understand is what the banks are really expecting the BoE to do about it? Write them a blank cheque at low than market rates? Why would the BoE do that?

I think this is some sort of power-play between the Banks and the BoE. I also think the BoE have done the correct thing in, so far, insisting this is not an interest rate issue, but a risk management issue.

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The Torygraph have had bearish sentiment for ages. But then, they've got a bit of a vested interest :lol:

Come on Laurejon, "no more boom and bust" Brown said, he's not the sort to tell porkies, especially in this, the best of all possible worlds.

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Banks lend money all the time to each other, why is all coming to a head this week, so what an IOU expires and needs refinancing, big deal, my car insurance is due this week, so is my house insurance, my council tax and gas bill, I have two options, pay for it with cash I have in reserve or borrow it and spread it over 6 months. Is this article saying that banks are so ****king stupid that they haven't prepared for it, honestly who writes this sh**e.

What you say is correct but your interpretation is wrong:

They can pay their bills with cash: Yes they can, and that comes out of their reserves, reducing the amount they can then lend out. That is the definition of a credit crunch, and will have repercussions for anything dependent on loans (such as business investment, or, for instance, house prices).

They can borrow to pay their bills: Yes, that would be the interbank borrowing market, where published interest rates are shooting up. (Furthermore, I don't have the link now, but the problem which was pointed out in a newspaper article last week, is that some banks can't find anyone prepared to lend to them.) Even if they do manage to borrow, the raised interbank borrowing rates, if sustained, will require them to raise interest rates on their lending, and will have repercussions for anything dependent on loans (such as business investment, or, for instance, house prices).

See? Not as benign as you paint it.

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Banks lend money all the time to each other, why is all coming to a head this week, so what an IOU expires and needs refinancing, big deal, my car insurance is due this week, so is my house insurance, my council tax and gas bill, I have two options, pay for it with cash I have in reserve or borrow it and spread it over 6 months. Is this article saying that banks are so ****king stupid that they haven't prepared for it, honestly who writes this sh**e.

what an ignorant buffoon you are. stop posting your sh**te as it just pollutes the forum,

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Are these Commercial papers a regular thing that normally present no problems, or is the hike in Libor and credit drought spectacularly bad timing just preceding a larger than usual maturity of these papers?

I'm trying to understand the impact and implication.

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I don't really understand why the banks are in such trouble - surely if they are sure they are not that exposed, they can simply borrow the money somehow?

I read on singingpig that the BoE are insisting this is due to counterparty risk while the banks are not. If this is true, why would the BoE not unserstand/believe this?

After reading about this for the last week, I'm still confused!

The banks probably do not have much specific exposure to subprime mortgage lender commercial paper debt, but the knock-on of liquidity in the CP market drying up is pretty significant.

Firstly, it is common for CP issuers to have an emergency back-up line with their bank, for which they must pay. This is usually specifically for cases where they are unable to borrow market through CPs. If a lot of companies need to call on these lines simultaneously, the banks will need to lend a lot of money and load it onto their balance sheet (contrary to popular belief, banks only like to lend a certain amount). To meet these demands, the banks will have to borrow more money to do so, but as we have seen from 3 month LIBOR, banks even are suddenly less willing to lend to other banks.

Also and secondly, banks are themselves big borrowers on the CP markets, so not only is the above emergency funding operation affected, but also for their day-to-day operations.

Thirdly, a company that is having problems raising it short-term cash management requirements, is more likely to have to call in the receivers, even if it is profitable. The bank may find that loans are not repaid in full and that it loses a customer who is profitable in numerous other ways.

Fourthly, banks make a packet out of their 0.01% on each CP and other types of debt that they broker.

Fifthly, banks make their profit from the speed and volume at which money is borrowed. The less that goes on, the more they will suffer.

The core problem is the assumption by blue chip companies that they would never have problems raising cash cheaply on the market for short-term requirements and the alternatives are either very expensive or insolvency.

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The core problem is the assumption by blue chip companies that they would never have problems raising cash cheaply on the market for short-term requirements and the alternatives are either very expensive or insolvency.

These problems will also affect small business, if the banks tighten lending.

Our business has a very healthy balance sheet, but we go from steady to getting very large contracts for us.... when that happens we need extra finance and if we can't get it we can't do the contract.

Also, in preparation of a coming problem, I have sold off most of my stock, reducing it from 1.2m to 400K. So we have freed up a fair bit of cash. Again, resessions are about allocating capital to the most effiecient use..... this is an ideal example as it has needed doing for ages. Some people act sooner than others.

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This huge refinancing, mainly through London, exceeds the $100 billion that became due in mid-August, and which sparked the most serious phase in the money-market crisis, which has seen banks scrambling for funds and market interest rates rising sharply. “This is a serious pressure point,” said one leading banker.

Bump.

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If you look in the small print of your savings account, you will also find they have the ability to freeze withdrawals - even on instant access accounts.

Scary mary. I'm going to have nightmares. :ph34r:

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The Times seems to have become a bear party in the last month - wonder why?

You should read the financial papers. The Economist is pretty bearish, in fact the editorial line seems to be that it is time for a crunch.

The FT called the top back in March / April, and now comes on like an Uber-bear, running round the place spilling picnics and swatting at bystanders with its big bear paws.

Don't even look at Moneyweek. It reads like a hysterical pastish of a doom-mongering gold ramper, written by Chris Morris.

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What I don't fully understand is what the banks are really expecting the BoE to do about it? Write them a blank cheque at low than market rates? Why would the BoE do that?

I think this should be a possible way out but... when the BoE writes out cheques at low interest rate it should also take a chunk of equity in the bank its writing them out to. This money which would be deemed future profit of the bank needing a bailout should then be used by the government to reduce tax payer burden to zero. This is a win-win if the sovereign state has to bail you out and the population and currency has to take the burden then that debt itself needs repaying (from the bank to the sovereign state) with interest. It also means the such lax lending does not go without punishment of the worst kind for a capitalist organization transferring such a burden onto the people.

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I think this should be a possible way out but... when the BoE writes out cheques at low interest rate it should also take a chunk of equity in the bank its writing them out to. This money which would be deemed future profit of the bank needing a bailout should then be used by the government to reduce tax payer burden to zero. This is a win-win if the sovereign state has to bail you out and the population and currency has to take the burden then that debt itself needs repaying (from the bank to the sovereign state) with interest. It also means the such lax lending does not go without punishment of the worst kind for a capitalist organization transferring such a burden onto the people.

wtf are you on about mate?

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We currently have a situation whereby Banks are holding on to their cash, and also refusing to lend to one another as they are unsure as to what their own exposure is, and also the exposure to failure of the banks wishing to borrow from them.

If the Banks dont trust each other enough to lend to one another, then we have hit the pinnacle of a impending downward slide. Get the snowboards out, its going to be a long way to the bottom!!!.

You cannot defy nature, and the laws of economics are also not to be defied. The balance will always come, either with us, or without us.

Edited by laurejon

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You cannot defy nature, and the laws of economics are also not to be defied. The balance will always come, either with us, or without us.

Basically shi't happens life goes on :)

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Why ever should BTL speculators pay the same rate as owner occupiers?

And why should they be able to borrow at the same LTV?

Surely, the risk in lending to these guys is higher than to OO's!

Traditionally BTL investors have been considered lower risk than occupiers, the risk is assessed on the property rather than the applicant, based on the reasoning that the property should be able to 'pay for itself'. So property details, local rental demand and rental income become the key criteria, rather than the credit worthiness of the applicant (though that is also assessed).

Arrears figures so far back this up, investment is less risky than residential, though whether by accident or design I don't know.

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