INTL Banking crisis: the world takes fright

October 7, 2008

Banking crisis: the world takes fright
Patrick Hosking


Panic swept through the world’s financial markets yesterday, wiping $2,500 billion from share values, amid concern that regulators and politicians were struggling to get a grip on the worsening crisis of confidence.

Share values plunged as some investors sold at any price and retreated to the safety of gold and government bonds. The FTSE 100 posted its biggest ever points fall, down 391 at 4,589, and at 7.85 per cent its biggest percentage fall since Black Monday in October 1987, reducing the value of British blue-chip companies by £93 billion.

The Dow Jones Industrial Average fell 370 points to 9,956, the first time it has sunk below the 10,000 mark in four years. At one point it was down 800 points. This morning in Tokyo the Nikkei 225 index fell more than 5 per cent within 30 minutes of opening.

The sell-off came as politicians desperately tried to soothe bank nerves, but came up with no immediate new measures. Alistair Darling, the Chancellor, told the Commons that he would do whatever was required to restore stability. EU leaders issued a joint statement saying that they would take the necessary measures to protect both the financial system and individual depositors.

In a further attempt to build confidence, the 16-nation Eurogroup of countries in the single currency promised to guarantee the survival of Europe’s key banks and insurance companies. The precise method of guarantee will be discussed today by the EU’s 27 finance ministers.

Share traders, however, were unnerved by the absence of any substantive new measures to ease the fears plaguing banks and paralysing the loan markets. Mr Darling played down speculation that he was about to announce a contingency plan to inject £40 billion to £50 billion of fresh capital into Britain’s high street banks.

He was locked in talks with bank chief executives last night to discuss how the tax-funded part-nationalisation scheme would work. It was not clear whether all banks would be asked to take part, although Royal Bank of Scotland, Barclays and the merger partners Lloyds TSB and HBOS were seen as highly likely candidates. HSBC and Banco Santander, the Spanish owner of Abbey, Alliance & Leicester and the savings arm of Bradford & Bingley, could also be included in such a bailout.

Gordon Brown expressed irritation that the Conservatives had gone public with calls for a recapitalisation after private briefings with the Governor of the Bank of England.

Iceland took control of its entire banking system yesterday in an attempt to restore calm. In Russia and Brazil the share market falls were so extreme that trading was suspended.

Bank shares once more bore the brunt of the selling frenzy in London. Shares in RBS sank 20 per cent to 148p, a new low since the credit crisis struck. HBOS was down 20 per cent and Barclays fell by 15 per cent.

Mr Brown said last night that the Government was ready to take action to prevent irresponsible risk-taking by banks and other financial institutions.

The markets needed morals, the Prime Minister said in a speech to the United Jewish Israel Appeal in London. “My values, the values of the country, celebrate hard work, effort, enterprise and responsible risk-taking: qualities that markets need to ensure that the rewards that flow are seen to be fair.”

Crude oil prices fell below $90 a barrel to an eight-month low on fears of a global slowdown, before rallying later. The gold price jumped more than 5 per cent.



http://business.timesonline.co.uk/t...ectors/banking_and_finance/article4895024.ece

October 7, 2008
In Crisis, Europe Isn’t in Sync
By NELSON D. SCHWARTZ and CARTER DOUGHERTY
PARIS — European governments pledged Monday to safeguard bank deposits in a bid to stem financial panic, but they stopped short of a coordinated strategy to break the grip of a credit crisis that now threatens to set off a protracted recession across the Continent, sending markets tumbling on both sides of the Atlantic.

The lack of orchestration — despite pledges to the contrary from European Union officials Monday and a plea from the head of the International Monetary Fund to step forward with concrete plans — raised the prospect that the European Central Bank would need to help mop up the mess by cutting interest rates, a move hinted at by the E.C.B.’s president, Jean-Claude Trichet, last week.




“We’ve seen both at the national level and more importantly at the international level, that there’s no strategy,” said Richard Portes of the Center for Economic Policy Research in London. “It reflects the underlying fact that individual governments don’t have a clear sense of where to go,” he added.

The crisis that began in the United States has rapidly spun out of control in Europe, with television film of ministers rushing to bail out some of the largest banks and a succession of meetings in Paris over the weekend feeding a climate of fear that has dried up the flow of credit just as some economies head for recession.

With European stocks being hammered — the FTSE index of British stocks down 7.9 percent, the DAX index of German stocks down 7.1 percent and the CAC index of French stocks down 9 percent — finance ministers gathered ahead of a meeting in Luxembourg on Tuesday to address the crisis and discuss a sharp increase in the level of deposit insurance across all 27 European Union member states.

But other bold Europe-wide approaches to the crisis have not yet emerged. Earlier Monday, Germany ruled out contributing money to a pan-European effort, even as officials said they were considering a broad package to shield their nation’s banks.

Meanwhile, authorities in Austria moved to match Germany’s decision on Sunday to guarantee bank deposits, and Spain pledged to follow suit if a single euro-zone policy was not found soon. Denmark went further, announcing it would also guarantee loans that banks make to one another overnight as banks continue to recoil from doing business among themselves.

Farther away, Iceland, one of the world’s hardest-hit countries from the credit turmoil, fell deeper into crisis as the government halted trading in all financial stocks after the banking sector neared collapse. The country suffered a fresh downgrade of its credit rating Monday after the government sought to grant itself sweeping new powers to intervene with troubled banks. Facing a cash squeeze as foreign investors withdraw their money, the government also beckoned its pension funds to repatriate money in an effort to reel in more cash.

That individual European governments continue to plot their own course in the crisis has not helped: Europe’s big cross-border banks find themselves trying to conserve capital and are cutting back on lending to local businesses.

In some cases, even loans within the same bank have been held up trying to cross borders because different units enjoy varying degrees of state backing, according to one top European banker who spoke anonymously because of market sensitivities.

These bottlenecks have altered the thinking of analysts who thought the region might escape the worst, and raised pressure on the E.C.B. to cut interest rates — perhaps the only significant euro-zone tool to ease the credit crisis that has yet to be deployed.

“The fear in Europe is that a recession may be a protracted one,” said Holger Schmieding, chief economist for Europe at Bank of America. “I hope we won’t go there, but the mood is dark.”

Mr. Schmieding now expects the economies of Britain, Germany and France — Europe’s largest — to contract in the fourth quarter of 2008. For 2009, he predicts growth of just 0.4 percent among the 15 nations that use the euro, less than half what he was predicting six weeks ago. “There’s a realization that the credit crunch has hit Europe with a lag of one year, and that’s turning into a serious constraint on the economy for the next six months,” he said.

At the same time, governments seem to have different priorities for cross-border institutions that need help, like Fortis, which had large operations in Belgium, the Netherlands and Luxembourg.

While government and central bank officials in Brussels were eager to sell the Belgian units of Fortis to BNP Paribas of France, sealing a deal Monday, officials in the Netherlands nationalized Fortis’s Dutch unit on Friday, keeping what had once been ABN Amro’s local retail branches in Dutch hands.

In London, the British government appeared to be moving closer to a partial nationalization of the industry to avoid falling behind other European countries that have moved ahead with their own strategies. Speaking to the House of Commons Monday, the chancellor of the Exchequer, Alistair Darling, said the government “will do whatever it takes to ensure that we stabilize the banking system.”

“All practical options must remain open to us,” he added, but he gave no timetable for action.

Top European officials defended their case-by-case approach to easing the crisis at the national level in the absence of pan-European tools like a federal budget and single banking supervisor. They also implied that the American strategy, which included a rocky road to final approval of a $700 billion rescue package, was not foolproof.

“It strikes me that governments have lived up to their responsibilities,” Mr. Trichet said ahead of a meeting of European financial ministers in Luxembourg scheduled for Tuesday. “Who can say we did worse than on the other side of the Atlantic?”

Nelson D. Schwartz reported from Paris and Carter Dougherty from Luxembourg. Julia Werdigier contributed
reporting from London and Judy Dempsey from Berlin.

http://www.nytimes.com/2008/10/07/b...login&partner=rssnyt&emc=rss&pagewanted=print

Financial crisis truly going global - even Iceland's in trouble
Kathleen Pender, Net Worth

Monday, October 6, 2008

(10-06) 19:01 PDT -- Stock markets around the world went into a frenzy today amid fresh signs that the credit crisis is spreading globally and threatening to spin out of control.

In the United States, the Dow Jones industrial average plunged 800 points during the day but trimmed its losses to close at to 9,944.40, down 369.88 points, or 3.6 percent. It was the average's first close below 10,000 since October 2004.

The Standard & Poor's 500 index fell 3.9 percent to its lowest close in almost five years. Only 49 of the 500 companies in the index rose. The tech-heavy Nasdaq composite fell 4.3 percent.

Investors ignored any benefits that might come from the $700 billion bailout bill approved by Congress last week and instead focused on developments overseas.

Following the U.S. playbook, European governments raced to rescue a slew of failing institutions over the weekend.

Germany agreed to insure all retail bank accounts and offered a $69 billion bailout of Hypo Real Estate, the nation's second-largest mortgage lender, after private lenders pulled out of an earlier rescue plan last week.

The governments of Belgium and Luxembourg arranged a complicated rescue of Fortis, a Dutch-Belgian-Luxembourg insurance and banking concern, by French bank BNP Paribas - again after a previous deal fell through.

In Iceland, things are so dire the government is considering using pension funds to rescue its ailing banking system, which swelled far out of proportion during the go-go-years and is now on the verge of collapse.

Stock markets around the globe tanked today. European stock exchanges posted declines ranging from 5.5 percent (Belgium) to 12 percent (Ireland), according to MSCI Barra. Brazil, Russia and Iceland temporarily halted trading in their stock markets to stem heavy declines.

How did the credit crisis, which started in the United States, go global?

U.S. financial engineers thought that they could spread the risk of individual loans going bad by packaging home, auto, credit card and other debt into complex securities and selling them to investors around the world. Many investors, relying on overly optimistic ratings issued by U.S. debt-rating agencies, used these securities as collateral to borrow more money.

Instead of spreading the risk, however, this process, called securitization, is now spreading fear.

When some mortgage-backed securities started performing worse than expected, investors worldwide became wary of all such securities and the market for them shut down. Not knowing how much they are really worth or who, exactly, owns them, investors and banks are afraid of lending to financial institutions, or putting new equity capital into them. That has led to a near-freeze worldwide in the availability of credit, which is threatening to choke off the global economy.

The crisis was not entirely U.S.-made however. In many developed countries, banks had become overextended, lending more than their deposit base in some cases, says Josephine Jimenez, who is launching a new emerging-markets fund called the Victoria 1522 fund. When depositors started withdrawing money, out of fear or necessity, many banks had to rein in their lending. Without access to new capital, some could become insolvent.

Hoping to prevent a run on their banks, the governments of Austria, Sweden, Denmark, the United Kingdom, Greece, Italy, France and Iceland have all raised or eliminated the ceiling on deposit insurance.

World credit markets showed few signs of improvement today.

Investors continued to snap up U.S. Treasury securities, considered a safe haven during a crisis. That pushed their prices up and their yields, which move in the opposite direction, down. The yield on the two-year Treasury notes fell 0.14 percentage point to 1.45 percent.

The London interbank offered rate, or Libor, for 3-month loans in U.S. dollars, fell slightly to 4.29 percent from 4.33 percent Friday, according to Bloomberg.com. The rate is a daily average of what banks charge other banks to lend money for various time periods in various currencies. The higher the rate, the more fear there is in the banking system. The Libor rate on overnight dollar loans increased to 2.37 percent from 2 percent on Friday.

Oil prices fell again today on concerns that a global economic slowdown could reduce energy demand. Crude-oil futures closed at $87.81 per barrel, down $6.07, on the New York Mercantile Exchange.

Including today's collapse, the Dow Jones industrial average is down almost 25 percent this year and almost 30 percent since its peak in October 2007.

"It's the most vicious bear market I've ever seen," says Thornton O'glove, who founded the Quality of Earnings Report and has been following the markets since 1967.

Although he would not be surprised to see a few more short-term rallies, based on previous bear markets he predicts the Dow could fall 50 percent from its previous high before turning up for good. We're three-fifths of the way there already



http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/10/06/MNQN13CDLT.DTL&type=printable