Western banks suffer big losses
By Gillian Tett and Paul J Davies in London and Stacy-Marie Ishmael in New York
Published: November 1 2007 19:55 | Last updated: November 1 2007 23:42
Global investors succumbed to a new bout of jitters on Thursday amid concerns that a host of important financial institutions are nursing additional problems related to the troubled US mortgage market.
Equity markets tumbled and bond prices rose in the US and Europe. US financial stocks endured their worst day in five years, with some of the worst falls suffered by large banks and smaller specialist credit insurers.
The S&P 500 index fell 2.6 per cent to 1,508.44, its worst day since August 9, dragged down by the 4.6 per cent drop in financial stocks. The London FTSE 100 index fell 135.5 points – 2 per cent – to 6,586.1, with similar falls in the German and French indices.
The signs of rising tension came as the Federal Reserve redoubled its efforts to keep the money markets functioning smoothly.
In its regular operations, the Fed added $41bn in temporary reserves to the banking system, the biggest one-day infusion since September 2001.
But the cost of interbank funds on Thursday remained above the Fed target. Analysts said the decision to cut interest rates to 4.5 per cent on Wednesday had offered little lasting comfort to investors.
Bond traders, however, priced in a greater chance of further rate cuts. The yield on the policy-sensitive two-year Treasury note fell 16 basis points to 3.77 per cent after having risen nearly as much in the immediate aftermath of the Fed’s rate cut.
“We have gone from a Fed saying they are neutral to figuring out what further losses the financials face and wondering whether that will force the Fed’s hand,” said Rick Klingman, interest rate trader at BNP Paribas.
The biggest single reason for the decline in equities was the revival of worries that big banks in the US and Europe would unveil further credit write-offs. Another focus of concern involved a less well-known pillar of the global financial system – smaller specialist insurers that provide credit guarantees to lenders and investors.
Shares in Radian, a private mortgage insurer, fell 19 per cent, after its first quarterly loss, due to mortgage-related problems. MBIA and Ambac, the two biggest bond insurers in the US, have also experienced dramatic declines, amid fears they, too, could be nursing unseen subprime-linked problems.
MBIA and Ambac – often called “monoline” insurers – say that they are well positioned and that their exposure to subprime assets is very small. But analysts fear that a worsening of the crisis could result in their losing their top-notch credit rating.
That, in turn, could trigger a “domino effect” that would cut the value of the bonds they have insured. The companies insure both complex securities backed by mortgages and less risky municipal bonds.
These concerns triggered a sharp rise in the cost of insuring monoline debt against default. The broader cost of buying protection against default of a basket of European and US bonds also reached the highest level in several weeks.
The rate of delinquencies among US mortgage borrowers, meanwhile, has doubled from the same period of last year, according to data from RealtyTrac. The main ratings agencies slashed to junk the ratings on more than $100bn in subprime mortgage- backed bonds in the past month.
The ABX index, which tracks such bonds, has fallen sharply in recent months. The riskiest slice of the index, which tracks bonds rated BBB-, has fallen about 80 per cent this year.