August 9th, 2007

Euro banks acknowledge problems / Central banks pour in money to keep system running

Posted in Money by ed

A few European banks today said they were having trouble because of the “evaporation” of the trading markets in asset-backed securities and CDOs, which made it impossible to evaluate their holdings.

So BNP Paribas, for one, said it is no longer permitting investors to take money out of three investment funds, which on paper, anyway, had lost 20% of their value in two weeks.

From a MarketWatch story:

QUOTE “The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating,” the bank added in a brief statement. …

BNP said it will resume valuations as soon as liquidity returns to the market and it is able to reliably value the funds again. END QUOTE

In response, the European Central Bank made a huge liquidity deposit into the system today — 130 billion (dollars).

And the US Fed Bank then followed with 20 billion.

And then the Canadian central bank did same, and issued the following statement:

QUOTE In light of current market conditions, the Bank of Canada would like to assure financial market participants and the public that it will provide liquidity to support the stability of the Canadian financial system and the continued functioning of financial markets. These activities are part of the Bank’s normal operational duties relating to the stability and efficient function of Canada’s financial system. The Bank is closely monitoring developments, and will deal with issues as they arise. UNQUOTE

So it does seem the awareness of the vast range of the problem is slowly spreading, and more trouble is ahead for the financial system.

Then again — do the banks think this is simply a “liquidity” problem (as when the huge hedge fund Long Term Capital Management failed in the late 90s)?  My guess is that it is more than that — that beneath the liquidity problem as a cause is not only the failure of AAA mortgage bonds, but the doubts about the value of the Rating Agency rating system provoked by those failures.

If/when you start seeing stories about credit-card bond failures — hit the deck.

Tony Crecenzi, a great watcher of the bond markets, had this to say this morning at (well worth the subscription if you are trading for a living — a wide, wide range of commentators for a relatively cheap price):

The $130 billion injection by the ECB is extraordinary. On Sept. 12, 2001, in response to the extraordinary circumstances, the total amount of deposits at the 12 Federal Reserve Banks, which captures the scale of the Fed’s liquidity injections, was $102 billion, 5 times normal. …

What stands out most from this situation is its proximity to the Federal Reserve’s meeting on Tuesday. If the Fed had even the slightest inkling that a problem of this scale might occur, its statement would have had a full tilt toward neutral rather than the partial tilt it gave. Today’s events show that either the Fed committed a large policy error on Tuesday, or that both the Fed and the ECB are themselves more in the dark on the problems that lie underneath the surface than are investors in the financial markets.

The European markets sold off heavily on this news. In the US, the Murdoch Industrials opened about 190 down, now down 130.

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One comment

  1. ed says:

    So, the Murdoch Industrials wound up down 387 on the day. Boom boom boom.

    August 9th, 2007 at 5:49 pm

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