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Tuesday, December 18, 2007

Bailing In Europe

UK government extends guarantees on Northern Rock obligations:
The guarantees will now include all wholesale loans and bonds that are not secured against assets, as well as derivatives trades, the U.K. Treasury said in a statement today. The government will also endorse covered bonds as well as repurchases of mortgages by the bank from its Granite securitization trust.

The Treasury said its plan from September to protect retail and wholesale depositors after the first run on a U.K. bank in more than a century ``will remain in place during the current instability in the financial markets.''
Whoa! This mule is moribund. They are going to have to nationalize it, I guess.

In the meantime, the ECB injected a trifling 500 mil into the financial system in Europe. Hey, what's a few Euros among friends?
The cost to borrow in euros through the end of the year plunged after the European Central Bank added an unprecedented $500 billion to the banking system as part of a global effort to ease gridlock in the credit market.

The amount banks charge each other for two-week loans in euros dropped a record 50 basis points to 4.45 percent, the European Banking Federation said today. The rate had soared 83 basis points in the past two weeks as banks anticipated a squeeze on credit through year-end.

``These are strong-arm tactics intended to show the market they're seriously committed to breaking the deadlock,'' said Marc Ostwald, a fixed-income strategist at Insinger De Beaufort SA in London. ``The ECB is helping to bankroll banks out of a problem that they themselves created.''
So interbank rates dropped 50 bps as a result. Naturally, if other banks go bust the effect will be short. Still, it's a resurrection of sorts. The ECB has thrown way more money at the problem than the US; FT story describes this attempt:
Emergency help for financial markets entered new territory on Monday night as the European Central Bank announced it would on Tuesday offer unlimited funds at below market interest rates in a special operation to head off a year-end liquidity crisis.

The surprise move, which follows last week's co-ordinated barrage of measures by the world's central banks to increase market liquidity, suggests the ECB is still frustrated at the failure to ease market tensions.

The measure was reminiscent of the ECB's operation on August 9, at the start of the global credit squeeze. But that was for overnight loans while the new offer is for two weeks.

Analysts warned that the measure risked increasing market volatility and saw the central bank breaking new ground in helping out the banking sector.

"This is basically Father Christmas to those who have access," said Erik Nielsen, economist at Goldman Sachs. "They are bailing out people who have not really adjusted their balance sheets to the new reality."
Yeah, yeah, yeah. I doubt very much GS has adjusted its own balance sheets to the new reality either. The bottom line is that GS traders have a big stake in the big bear market, and they need a little help from their friends to get there.

Another big question is what about the other two UK banks at risk? I won't name them, but Northern Rock is not the only stinking fish in the barrel.

In the US, the OTS woke up and is changing its ratings system for savings and loan holding companies to concentrate just a wee bit more on their total risk exposures. Imagine this:
Within the Organizational Structure component, examiners will assess inherent risk in the context of lines of business, operations, affiliate relationships, concentrations, and other exposures.
...
Historically, OTS has based the rating of the holding company enterprise on its effect on its subsidiary thrift. OTS has encountered situations where it has supervisory concerns within the holding company enterprise, which did not have a direct impact on the thrift. OTS believes that using the effect on the thrift subsidiary as a SLHC rating criterion can lead to misinterpretation of the rating.
Hmmm. I'm sure this has nothing at all to do with my vision of the flashing initials CW and WM.

For those who know how to read them, there is considerable understated humor and drama in the grave releases put out by the regulatory agencies. For instance, there must be a saga behind this little mash note from the FRB:
The purpose of this letter is to clarify the Federal Reserve’s expectations regarding confidentiality provisions in agreements between a banking organization and its counterparties (for example, mutual funds, hedge funds, and other trading counterparties) or other third parties. It is contrary to Federal Reserve regulation and policy for agreements to contain confidentiality provisions that (1) restrict the banking organization from providing information to Federal Reserve supervisory staff;1 (2) require or permit, without the prior approval of the Federal Reserve, the banking organization to disclose to a counterparty that any information will be or was provided to Federal Reserve supervisory staff; or (3) require or permit, without the prior approval of the Federal Reserve, the banking organization to inform a counterparty of a current or upcoming Federal Reserve examination or any nonpublic Federal Reserve supervisory initiative or action. Banking organizations that have entered into agreements containing such confidentiality provisions are subject to legal risk.
I burst out laughing when I read this one. I have a suspicion on the originating parties, but no proof. Think "insider trading".

Yet another credit union has gone bad. This one is only being placed in conservatorship:
The State of Colorado has assumed control of the operations of Zion United Community Credit Union, a state-chartered, federally insured credit union serving residents in Denver, Colorado.
National City filed a love note of its own with the SEC yesterday. Housing Wire has the story and so does CR. The bottom line is that their commercial loans are entering the containment zone.

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