Page 4 of
5 CREDIT BUBBLE
BULLETIN Nationalization and
dislocation Commentary and
weekly watch by Doug
Noland
spokeswoman…said… Thornburg may
declare bankruptcy if it can’t raise $948 million
by next week, the company said… ‘It’s going to be
a weekend of contemplation for anyone waiting to
pull the trigger on that deal,’ said analyst Jason
Arnold at RBC Capital Markets… ‘People lost a lot
of money on the previous deal.’"
March 21
- Wall Street Journal (David Enrich, Liz Rappaport
and Liam Pleven): "Main Street is about to feel
another tremor from Wall Street. CIT Group Inc.
said Thursday that its normal sources of funding
have dried up because of the credit crisis,
forcing the… company to draw down its entire $7.3
billion line of backup credit. That could mean
trouble for commercial borrowers, since CIT will
shrink its lending operations
and sell assets in order to conserve cash. ‘We
recognize that, given the current market
environment, we need to run a smaller company,’
said Jeffrey Peek, CIT's chief executive. While it
isn’t a bank, CIT is a major lender that
specializes in providing financing to companies of
all sizes that often can’t get all the capital
they want from traditional banks. With customers
in more than 30 industries and 50 countries, CIT
had managed assets of $83.2bn as of Dec. 31… Since
CIT can’t fund its operations with bank deposits,
it typically relies on a combination of financing
including short-term borrowing known as commercial
paper as well as asset backed markets and the
corporate bond market."
March 19 -
Bloomberg (Shannon D. Harrington): "CIT Group
Inc., the largest independent commercial finance
company in the US, may need to tap $7.3 billion in
unsecured bank lines because its access to
traditional debt markets has become ‘materially
constrained,’ Fitch Ratings said…"
March
19 - Bloomberg (Jody Shenn): "Merrill Lynch &
Co. sued XL Capital Assurance Inc. to force the
bond insurer to honor $3.1 billion of guarantees
on collateralized debt obligations as the
securities firm attempts to avoid more writedowns
of mortgage-backed debt. ‘We filed suit to make
clear that XL Capital Assurance Inc. is required
to meet its contractual obligations,’ Mark Herr, a
spokesman for…Merrill, said… ‘Apparently in light
of the current dramatic downturn and deterioration
in the credit markets, defendants are having
‘sellers’ remorse,’ Merrill said…"
March
19 - Dow Jones (Laura Mandaro): "Instead of
waiting for the US government to fix the nearly
defunct market for auction-rate securities,
counties, states and health authorities seeking to
raise money are increasingly turning to
money-market funds to get cash. As a result, the
once little-known market for auction-rate
securities, propelled into the headlines by
turmoil in financial markets, is witnessing a mass
flight of municipal debt to other sources of
funding… The auction-rate market ‘is broken, it’s
dead, it’s going away,’ said Joe Lynagh, portfolio
manager for five municipal money-market funds at
T. Rowe Price Group…"
March 19 - Dow Jones
(Min Zeng): "There is no sigh of relief in
short-term funding markets Wednesday as concerns
over the credit-market crunch and rising cash
demand ahead of the quarter-end pushed up
borrowing costs in the US and Europe. After a
brief euphoria Tuesday following the Federal
Reserve’s interest-rate cut and
better-than-expected broker earnings, jitter
returned to markets overnight amid worries about
hedge fund troubles and concerns over the health
of the U.K. banking system. Credit concerns,
coupled with surging cash demand among companies
to protect their balance sheets leading into the
quarter end and the Easter Holiday Friday, pushed
term London interbank offered rates in dollar,
euro and pound higher."
March 19 -
Bloomberg (Katherine Burton and Saijel Kishan):
"JWM Partners LLC, the investment firm run by
ex-Long-Term Capital Management LP chief John
Meriwether, lost 24% in its $1 billion
fixed-income hedge fund this year through March
14… Meriwether’s Relative Value Opportunity fund
was hurt as bond managers such as Peloton Partners
LLP and Carlyle Capital Corp. were forced to sell
securities to meet margin calls…"
March 19
- Dow Jones (Margot Patrick): "Sharp moves in
Japanese bonds this month have wiped more than
$725 million off a $2.9 billion fixed-income hedge
fund run by Endeavour Capital LLP, heightening
concerns about how hedge funds are faring in
increasingly volatile interest-rate markets.
Endeavour Capital Chief Executive Paul Matthews
said the Endeavour Fund lost money as the spread
between shorter- and longer-dated Japanese
government bond yields rose… ‘The move we’ve seen
is far more than anything that happened in the
past in these instruments,’ Matthews told Dow
Jones… ‘It’s one thing to have the market move
against you but the lack of liquidity, to not be
able to get out of government bonds, is very
unusual,’ he added. London-based Endeavour closed
out nearly all of its Japanese bond positions over
the past several days, and has reduced its use of
borrowed money on government bond trades to 12.5
times investor capital from around 18 times."
March 20 - Dow Jones (Alistair Barr):
"Hedge funds moving from Bear Stearns Cos. to
rival prime brokers may be facing tougher
borrowing requirements as investment banks cut
back on the amount of money they are willing to
lend to some managers in the $2 trillion
business."
March 19 - Bloomberg (Yalman
Onaran and Christine Harper): "Goldman Sachs Group
Inc. and Morgan Stanley, the two biggest US
securities firms, said they've used a lending
facility created by the Federal Reserve to ease
concerns that Wall Street faced a cash shortage.
‘We have tested the window because we want to
remove the stigma from the window,’ Morgan Stanley
CFO Colm Kelleher said… ‘It’s meant to be there
for normal business. It’s not meant to be there as
a last-recourse thing.’"
March 20 - Dow
Jones (Lavonne Kuykendall and Chad Bray): "Bond
insurers have reassured investors for months that
ironclad protections they built into insurance
policies for derivatives gave them unique controls
over the complex securities they guaranteed. Now
those contract clauses may help in an unexpected
way: by giving bond insurers a way out of some of
the most exposed deals. Bond insurer Security
Capital Assurance says that Merrill Lynch &
Co. signed seven credit default swap contracts
with Security Capital subsidiary XL Capital
Assurance Inc. that gave the bond insurer ultimate
control of underlying collateralized debt
obligations totaling $3.1 billion in face value.
Merrill then violated the agreement, SCA says, by
making side deals giving the same control to rival
insurer MBIA Inc. The issue plays into what bond
insurers have long called one of the strengths of
the financial guarantees they write on investment
bank securities: the powers they can exercise when
something goes wrong."
March 20 - Reuters:
"Security Capital Assurance said… it had severed
seven credit guarantee contracts with a Merrill
Lynch unit because Merrill had given important
rights promised to it under the contracts to at
least one other party. Merrill Lynch is suing the
XL Capital Assurance unit of Security Capital to
force the insurer to make good on the agreements.
Security Capital said XL Capital was promised
control rights on the $3.1 billion of portfolios
it had guaranteed for Merrill Lynch International,
but Merrill Lynch had given those same rights to
one or more third parties. ‘The decision to
terminate the Merrill Lynch International
contracts was not made lightly,’ Security Capital
said. By terminating the contracts, Security
Capital is hoping to get out from under an
obligation that could cost it hundreds of millions
of dollars. But ending the contracts could force
Merrill Lynch to write down billions of dollars of
exposure."
March 20 - Bloomberg (Oliver
Suess): "IKB Deutsche Industriebank AG, the first
German casualty of the collapse of the US
subprime- mortgage market, forecast a wider loss
and said it will need a fourth government bailout.
IKB fell to the lowest in at least 11 years… KfW
Group, the state-owned development bank that
controls IKB, will inject another 450 million
euros to shore up the lender."
March 20 -
Bloomberg (John Glover): "The cost of protecting
the bonds of Kaupthing Bank hf, Landsbanki Islands
hf and Glitnir Banki hf against default soared to
records this week amid concern Iceland’s three
largest banks may be unable to fund themselves.
Credit-default swaps on Kaupthing, Iceland’s
biggest bank, rose 22 bps to 855… The cost of the
contracts is about seven times more than the
average for banks in Europe…
March 19 -
International Herald Tribune (Sandra Hernandez):
"The Australian property investor Rubicon Japan
Trust warned…that it would not be able to meet an
expected margin call… Joining a growing list of
Australian companies facing margin calls as
nervous banks call in their loans amid a deepening
credit crisis, Rubicon said it might be unable to
pay its debts if it cannot reach an agreement on
the margin call of 30 million Australian dollars,
or $28 million, with National Australia Bank, or
NAB."
Currency Watch The dollar
index rallied 1.5%, ending the week at 72.71. For
the week on the upside, the South Korean won
increased 1.9%, the
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