Banks losing up to $52 billion over subprime

Credit Suisse analysts estimated banks could lose up to $52 billion over time due to their exposure to collateralized debt obligations that invested in U.S. subprime mortgages. Most of the losses would stem from loans to hedge funds, compared with an expected $5 billion to $10 billion from banks' direct investment in subprime CDOs, the Credit Suisse analysts said in a report dated July 6.

In June, fears of hedge fund losses in subprime mortgages, or home loans made to borrowers with blemished credit histories, rattled financial markets after news of hefty losses at two funds managed by Bear Stearns. Troubles at several other hedge funds have came to light since Bear Stearns' fund problems: Cheyne Capital's Queens' Walk, Cambridge Place Investment's Caliber Global Investment, and United Capital's Horizon Funds.

Worries about broader systemic impact from subprime woes have kept some investors on the defensive, spurring bids for low-risk investment such as U.S. Treasury securities. Subprime CDOs are instruments created from securities backed by subprime mortgages whose fortunes deteriorated with a spike in loan defaults and delinquencies.

United Capital halts hedge fund refunds

news.yahoo.com

United Capital Markets Holdings Inc. has stopped honoring refunds to investors in some of the firm's Horizon Strategy group hedge funds that invested in subprime-mortgage bonds, Bloomberg reported on its Web site on Tuesday [3 Jul 2007].

The funds hold most of the firm's assets under management, which stood at about $619 million as of March, according to the report. The company has had an unusually high number of redemption requests, including one from an investor who had put up about 25% of the funds' money, and it did not want to be a forced seller of securities, Bloomberg said.

BIS warns of Great Depression dangers from credit spree

telegraph.co.uk

The Bank for International Settlements, the world's most prestigious financial body, has warned that years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood. "Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and southeast Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a 'new era' had arrived", said the bank.

The BIS, the ultimate bank of central bankers, pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system. "Behind each set of concerns lurks the common factor of highly accommodating financial conditions. Tail events affecting the global economy might at some point have much higher costs than is commonly supposed," it said.

The BIS said China may have repeated the disastrous errors made by Japan in the 1980s when Tokyo let rip with excess liquidity. "The Chinese economy seems to be demonstrating very similar, disquieting symptoms," it said, citing ballooning credit, an asset boom, and "massive investments" in heavy industry. Some 40% of China's state-owned enterprises are loss-making, exposing the banking system to likely stress in a downturn. It said China's growth was "unstable, unbalanced, uncoordinated and unsustainable", borrowing a line from Chinese premier Wen Jiabao.

The BIS said last year's record issuance of $470bn in collateralized debt obligations (CDO), and a further $524bn in "synthetic" CDOs had effectively opened the lending taps even further. "Mortgage credit has become more available and on easier terms to borrowers almost everywhere. Only in recent months has the downside become more apparent," it said. CDO's are bond-like packages of mortgages and other forms of debt. The BIS said banks transfer the exposure to buyers of the securities, giving them little incentive to assess risk or carry out due diligence. "Sooner or later the credit cycle will turn and default rates will begin to rise," said the bank.

- The contrarian community has been sounding the alarms on this debt and mortgage thing for years. Now that the mainstream is starting to pick it up, it will be quite interesting to see what is "on the other side", so to speak.

We are quite close now. Some commentators say we have, maybe, weeks. The S&P 500 seems to be building up a triple-top formation. "Look out below"? Perhaps this MBS/CDO business might be the trigger event.