Banks 'set to call in a swathe of loans'
By Ambrose Evans-Pritchard
TheUnited States faces a severe credit crunch as mounting losses on riskyforms of debt catch up with the banks and force them to curb lendingand call in existing loans, according to a report by Lombard StreetResearch.
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Thegroup said the fast-moving crisis at two Bear Stearns hedge funds hadexposed the underlying rot in the US sub-prime mortgage market, and thevast nexus of collateralised debt obligations known as CDOs.
"Excessliquidity in the global system will be slashed," it said. "Banks'capital is about to be decimated, which will require calling in aswathe of loans. This is going to aggravate the US hard landing."
CharlesDumas, the group's global strategist, said the failed auction of assetsseized from one of the Bear Stearns funds by Merrill Lynch had revealedthe dark secret of the CDO debt market. The sale had to be called offafter buyers took just $200m of the $850m mix.
"The banks were not prepared to bid over 85pc of face value for CDOs rated "A" or better," he said.
"God knows how low the price would have dropped if they had kept on going. We hear buyers were lobbing bids at just 30pc.
"Wedon't know what the value of this debt is because the investment banksshut down the market in a cover-up so that nobody would know. There is$750bn of dubious paper out there in the form of CDOs held by banksthat have a total capitalisation of $850bn."
USproperty writer Paul Muolo described the Bearn Stearns crisis as the“subprime Chernobyl”, saying the bank had created a “cone of silence”.
Abandoned by fellow banks, Bear Stearns has now put up $3.2bn of itsown money to rescue one of the funds, a quarter of its capital.
Thisis the biggest bail-out since the Long-Term Capital Management crisisin 1998, which Bear Stearns refused to join at the time. Bear Stearnsis now alone, a case of rough justice being served.
