F. T. : Global Financial System Braced For Ripple Effect

[Realistbear]

http://www.ft.com/cms/s/0/92543f2c-f200-11...00779fd2ac.html

Global financial system braced for ripple effect

By Michael Mackenzie and Aline van Duyn in New York and Peter Thal Larsen in London

Published: March 14 2008 20:08 | Last updated: March 14 2008 20:08

Bear Stearns is hardly Wall Street’s biggest investment bank but its travails have

far-reaching consequences

for the global financial system because of its crucial behind-the-scenes role in some of the world’s most troubled markets.

Bear is a significant underwriter of mortgage securities, an active trader of derivatives and leading financier of hedge funds.

Analysts said it was almost

impossible to know what impact Bear’s problems

would have on its clients, its counterparties and on other investors holding securities or derivatives that Bear is trying to liquidate.

“The ripples could be widely felt because Bear Stearns has so many points of contact with everyone else in the financial industry,” said Matt D’Amico, partner in the banking business at law firm Bryan Cave.

Evidence of bubbling contagion in the financial markets can be seen in the dramatic surge in the cost of credit insurance for global banks. Many banks have double-A credit ratings, but the price charged to insure their debt is more typical of lower-rated companies

.

This breakdown in the credit derivative market illustrates the close ties of global finance. Insurance contracts on the banks are transacted in the over-the-counter (OTC) market, an arena created by the banks where they and their customers trade directly with each other.

The $45,000bn (€17.033bn, £22,342bn) of contracts in the credit default swaps market, in turn, is part of a bigger OTC derivatives market. It includes common financial instruments used by corporate treasurers and investors such as interest-rate swaps – with $347,000bn in notional outstanding contracts.

“Bear Stearns is counterparty to a huge number of OTC derivatives, and it is not just the unwinding of contracts with Bear that are a concern, but the ability of this market with relatively weak and untested infrastructure to handle such a shock,” said Karen Petrou, managing partner at Federal Financial Analytics.

Participants post collateral with each other when they trade derivatives, but it is unclear whether this will cover potential losses in the event of a crisis.

The effects of Bear Stearns are already felt in markets where the bank has tried to sell assets to meet its cash requirements.

A shortage of liquidity has forced investment banks and hedge funds to offload mortgage-backed securities and other assets at discount prices. Indeed, some rivals say Bear’s distress was evident on Thursday when it sold a large number of securities backed by Alt-A mortgages at distressed prices.

Wall Street investment banks are already expected to report significant additional losses on the mark-to-market valuations of securities when they report earnings next week.

We should not underestimate the power of this global meltdown in the banking system.

Anecdotally, I was in my local Toyota dealership yesterday and was offered a popular diesel powered Yaris for less than dealer's invoice cost AND 3 years interest free credit. The dealers are being told to liquidate stock--now.

Edited March 16, 2008 by Realistbear

[Realistbear]

Anyone up for posting a BLACK MONDAY, March 17th thread?

There has been a slew of bad newsx leaked out this weekend on both side of t'pond. We haven't seen a 500 plus drop on the Dow or a 300 plus drop on the FTSE yet and it seems a bit overdue.

[insidetrack]

Anyone up for posting a BLACK MONDAY, March 17th thread?

There has been a slew of bad newsx leaked out this weekend on both side of t'pond. We haven't seen a 500 plus drop on the Dow or a 300 plus drop on the FTSE yet and it seems a bit overdue.

I posted one this morning but it seems to have disappeared. Maybe there is an embargo on them until midnight.

Edited March 16, 2008 by insidetrack