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22 April 2024

Bank gloom overshadows lower market rate prospects

By Agencies



Further United States interest rate cuts may be in the offing and money market rates easing but news from the world’s major banks on Friday gave no indication that the global credit crisis is abating.

Merrill Lynch is expected to suffer losses stemming from wrecked mortgage investments, almost twice its original estimate, according to the New York Times.

As a result, Merrill is seeking more capital from an outside investor, the paper said, citing people who had been briefed on the company’s plans.

The bank reports its results next week. In Europe, Swiss bank UBS said it could not predict the final impact of the sub-prime crisis but that a new capital injection would strengthen its position as it called on shareholders to support its emergency capital hike.

“During 2008, the environment for financial markets, especially in the US, is uncertain,” the bank said in a letter to shareholders, dated January 10 and released to media on Friday.

“We cannot, at this time, accurately predict the future development of US residential mortgage markets and therefore the ultimate impact on our positions in sub-prime mortgage related securities,” the letter said.

The Swiss bank has been one of the biggest casualties of the collapse in the US sub-prime mortgage market, which has resulted in billions in writedowns by top banks and stopped them lending to each other – a crucial flow of money to keep the global economy’s wheels oiled.

“Investors are truly nervous. The Fed is confirming in people’s minds they truly see the outlook containing negative economic risks,” said White Funds Management portfolio manager Angus Gluskie.

The Wall Street Journal had reported that both Merrill and Citigroup were in discussions to clinch more capital from investors, primarily foreign governments.

Citigroup could get as much as $10bn, likely from foreign governments, while Merrill was to get $3-4bn, much of it from a Middle Eastern government investment fund, the report said.

Banks, wrestling with huge losses stemming from mortgages lent to people ill-equipped to repay them, have been seeking cash from sovereign wealth funds.

In December, Merrill Lynch raised as much as $7.5bn after selling a stake to Singapore’s Government and an asset manager.

Morgan Stanley has said it will receive $5bn from China after recording $9.4bn of write-downs.

Citigroup in November agreed to sell up to a 4.9 per cent stake to Abu Dhabi for $7.5bn, while UBS said it was accepting a $9.75bn investment from another Singapore state fund.

Bernanke offers hope

Markets took some comfort from the prospect, dangled on Thursday by Federal Reserve Chairman Ben Bernanke, of significant further US rate cuts.

Bernanke said the US economic outlook had worsened in the wake of a housing slump and subsequent credit market turmoil.

“In light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary,” he said at an event sponsored by two finance groups. “We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.”

Money market rates have eased since the Fed and other major central banks launched co-ordinated action to offer short-term funds to free up jammed interbank lending.

The European Central Bank and Swiss National Bank said on Thursday they will keep up unprecedented US dollar lending to banks for at least another month aimed at calming credit market tensions.

The Fed is also poised to act again next week.

ECB President Jean-Claude Trichet said after talks with Bernanke he will repeat December’s auctions of $20bn in one-month funds for euro zone banks, which had struggled to get dollar loans and pushed up US market rates.

The SNB will repeat a similar auction of $4bn.

But most experts say the threat of further losses at major banks from investments tied to US sub-prime mortgages means the crisis is far from over, as crucial lending between commercial banks remains patchy at best. And markets fear that if the Fed is prepared to cut rates sharply, it must be worried. (Reuters)

GSO sale

Private equity firm Blackstone Group said it will buy hedge fund GSO Capital Partners for up to $930 million (Dh3.5 billion) in cash and stock, scooping up a mid-sized lender at a time when Wall Street banks’ loan operations remain pressured by the credit crunch.

The private equity firm also announced a $500m stock buyback plan, which helped send its share price 10 per cent higher to close at $19.94.

Blackstone, which has total assets under management of $98bn, said the GSO deal will create one of the largest credit platforms in the alternative asset management business, giving it more than $21bn of assets under management.

The deal comes after turmoil in the credit markets in the summer effectively closed the door for large leveraged buyout deals. Buyout volume as a whole dropped 62 per cent in the second half of 2007 compared with the first half.