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City Absorbs Analysis Of Credit Squeeze -ft Article

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http://www.ft.com/cms/s/0/507b2132-6179-11...00779fd2ac.html

City absorbs analysis of credit squeeze

Published: September 13 2007 03:27 | Last updated: September 13 2007 03:27

A wry smile here, a shrug of the shoulders there and an occasional rant summed up the City’s response to Mervyn King’s submission to parliament’s Treasury committee on Wednesday.

The Bank of England governor’s position on the seizing-up of the money markets – it is ultimately the fault of the financial institutions for failing properly to assess just how risky some investments are – is widely known in the financial world.

Some people in the City privately agree with the governor that the credit crunch has been caused to a large degree by the banks themselves, because they promised to provide credit lines they hoped they would never have to honour.

After setting up risky investment vehicles, which borrow in the short-term markets at low rates and lend in longer-term assets at higher rates to make their money, the banks cannot expect the Bank to bail them out when the storms hit, say those in agreement with Mr King.

But other bankers are more hostile, accusing the Bank of failing to live in the modern world – even if the drying-up of liquidity is the result of banks holding on to their cash because they fear they may have to lend to investment vehicles they are committed to fund in the event of trouble.

“You have to be practical in these markets,” said one senior banker. “It is one thing for Mervyn King to say it is our fault, but this is the Bank of England still living in the 1950s. The Bank is full of career people who have not worked in the commercial markets. You have to step back and ask: where is our priority? Are we going to be practical and get the problem sorted out.

“This liquidity problem could snowball. A lot of experienced bankers are saying, ‘We’ve not seen this type of illiquidity in the money markets for years. It could lead to a recession.’”

Amanda Sudworth, in charge of short-term interest rates at the City’s main derivatives exchange, Liffe, said the Bank’s decision not to pump money into the system had led to record levels in the rates at which banks lend to each other.

“I do not recall anything like it in 20 years. Sterling Libor [the London Interbank Offered Rate] is trading around one percentage point over base rates.

“This has big implications for the real economy: that is, the rates at which institutions will lend to their customers may rise.”

Other bankers were phlegmatic about the governor publicly stating a position they had been aware of for months.

As one put it: “Mervyn King is saying this money-markets crisis has been caused because too many institutions have given promises on credit lines they never expected to fulfil, and now they are panicking that they will have to pay up.

“He’s said he will act as a lender of last resort at punitive rates if the banks want it – and that’s his position.”

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Amanda Sudworth, in charge of short-term interest rates at the City’s main derivatives exchange, Liffe, said the Bank’s decision not to pump money into the system had led to record levels in the rates at which banks lend to each other.

Rot.

With double digit growth in money supply and dodgy cpi stats, the only thing that is amazing is that base rates aren't higher, these are not record levels of rates by any stretch of the imagination - unless of course behind the doors that rates that banks are quoting each other are in the 10's of percent.

“I do not recall anything like it in 20 years. Sterling Libor [the London Interbank Offered Rate] is trading around one percentage point over base rates.

An indication that the base rate is too low for the level of risk implied in the market perhaps?

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Amanda Sudworth, in charge of short-term interest rates at the City’s main derivatives exchange, Liffe, said the Bank’s decision not to pump money into the system had led to record levels in the rates at which banks lend to each other.

Rot.

With double digit growth in money supply and dodgy cpi stats, the only thing that is amazing is that base rates aren't higher, these are not record levels of rates by any stretch of the imagination - unless of course behind the doors that rates that banks are quoting each other are in the 10's of percent.

“I do not recall anything like it in 20 years. Sterling Libor [the London Interbank Offered Rate] is trading around one percentage point over base rates.

An indication that the base rate is too low for the level of risk implied in the market perhaps?

I could not agree more. I think Libor is about 6.95% at the mo. Yes I think you are right and the base rates should be higher, they are being artificially suppressed thereby leading people to borrow irresponsibly thereby increasing risk. I was out with a chap last night looking to borrow large to buy a nice home. He said he wanted to take full advantage while rates are still low. The B of E and the media are sending out the wrong signals.

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Guest wrongmove
I could not agree more. I think Libor is about 6.95% at the mo. Yes I think you are right and the base rates should be higher, they are being artificially suppressed thereby leading people to borrow irresponsibly thereby increasing risk. I was out with a chap last night looking to borrow large to buy a nice home. He said he wanted to take full advantage while rates are still low. The B of E and the media are sending out the wrong signals.

Libor is bank to bank lending rate, and not necessarily correlated to say, mortgage rates.

The banks are hoarding thir cash at the moment - they don't want to lend it to other banks.

At least part of the reason they are hoarding cash, is that they want to keep it available for lending to customers.

Mortgage rates tend to be correlated to swap rates. These haven't shot up like libor, and in some cases have actually dropped.

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Mortgage rates tend to be correlated to swap rates. These haven't shot up like libor, and in some cases have actually dropped.

Interesting points. In the end the value (price) of every financial instrument is correlated, it's one big circular cluster

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Guest wrongmove
In the end the value (price) of every financial instrument is correlated, it's one big circular cluster bomb?

:P

Edited by wrongmove

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Interesting points. In the end the value (price) of every financial instrument is correlated, it's one big circular cluster

One big circular cluster sounds like a snowball to me.

http://ftalphaville.ft.com/blog/2007/09/12...al-finance-snow

Chemical finance? Snowball notesUs innocent types on FT Alphaville thought a snowball was a slightly naff cocktail, an Advocaat-based drink from the 70s. Either that, or a little white pill popped occasionally on a Saturday night.

But no. This snowball is another, potentially more noxious variety.

The question of what a financial snowball looks like was prompted by this release, a notice of a class action lawsuit filed by Aidikoff, Uhl & Bakhtiari against Morgan Stanley in the US District Court for the Central District of California. The suit is filed on “behalf of all persons who purchased or otherwise acquired “Snowball notes” issued by Bayerische Landesbank and underwritten by Morgan Stanley” between August 30, 2004 and the present.

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