No quick end to turmoil, says Paulson
By Eoin Callan and Jeremy Grant in Washington and Tony Barber in Brussels
Copyright The Financial Times Limited 2007
Published: September 11 2007 22:31 | Last updated: September 11 2007 22:31
The crisis of confidence in credit markets is likely to last longer than previous financial shocks of the past two decades, Hank Paulson, Treasury secretary, warned on Tuesday.
He said the uncertainty in credit markets would last longer than the turmoil that followed the Asian crisis and the Russian default of the 1990s or the Latin American debt crisis of the 1980s.
Mr Paulson was speaking in Washington as Jean-Claude Trichet, the European Central Bank president, warned that it was time for global financial authorities to tackle unregulated entities whose activities had contributed to the latest upheavals.
The comments came as it emerged that credit ratings agencies have been called to a special meeting in Washington by the umbrella body for the world’s securities regulators to explain how they rate structured financial products based on mortgage assets.
Like Mr Trichet, Mr Paulson said the complexity and global distribution of the securities at the heart of the credit crisis would prolong it. “We expect this period of turbulence to go on for a while,” he said.
Mr Paulson said he had been an investment banker at Goldman Sachs during the “Russian default, Asian crisis . . . and Latin American credit crisis” and expected this bout of uncertainty in credit markets was “going to take longer” to resolve.
US authorities expect that the uncertainty over valuing subprime mortgages could last for up to two years as many such loans reset to higher rates.
However, equities rallied strongly as investor hopes continued to rise that the Federal Reserve would be forced to make interest rate cuts by as much as 50 basis points next week in a bid to stop the economy sliding into a sharp economic downturn.
On Wall Street, the Dow Jones Industrial Average closed 1.4 per cent higher at 13,308.39. Gains were sharper in Europe where the FTSE 100 jumped 2.4 per cent in the UK and the pan-European benchmark, the FTSE Eurofirst 300 index, rose 1.7 per cent, its biggest one-day gain for three weeks.
Rate cut expectations put pressure on the dollar, which dropped to within touching distance of a record low against the euro.
The US currency fell 0.2 per cent to $1.3835 against the euro, just shy of the record low of the $1.3852 it hit on July 24.
Mr Paulson said the likely duration of the turmoil reflected the difficulties of financial services companies in valuing complex assets tainted by mortgage-backed securities.
“The reason it is going to take longer today [than in previous crises] is that we are more globalised,” he said. US mortgages had been “sliced and diced” and were turning up at Landesbanken – state-run regional banks in Germany.
“Secondly, it is the level of complexity,” he said, adding that he had met daily with bankers trying to value asset-backed commercial paper and other products.
“When they are confident they understand the products, confidence will return,” he said.
In Europe, money markets remained beset by problems in rolling over large amounts of ABCP maturing over the next three months. A key borrowing level for investors, the three-month London interbank offered rate hit a nine-year high of 6.90375 per cent.
Dealogic estimates that in Europe just over $50bn of ABCP matures over the next week, while $109bn of paper matures during September.
Mr Trichet suggested that the ECB had sympathy with the demands of some European politicians for tighter supervision of credit ratings agencies, but that investors who made poor decisions had themselves to blame.
Additional reporting by Joanna Chung and Peter Garnham
Regulators call summit with ratings agencies
By Jeremy Grantin Washington
Copyright The Financial Times Limited 2007
Published: September 12 2007 03:00 | Last updated: September 12 2007 03:00
Credit ratings agencies have been called to a special meeting in Washington by the umbrella body for the world's securities regulators to explain how they rate structured financial products based on mortgage assets.
The move shows that concern over the potential for conflicts of interest between the agencies and the issuers whose securities they rate has risen to the top of the agenda for regulators.
The International Organisation of Securities Commissions (Iosco) this year completed a review of a "code of conduct" issued to credit ratings agencies in 2004.
Philippe Richard, Iosco secretary-general, said the group had identified "a new potential problem with the way structured financial products are rated by the agencies".
Mr Richard said Iosco had since March been co-ordinating with the Committee on the Global Financial System - which monitors developments in financial markets for central bank governors of the G10 countries - on a fresh effort to study credit ratings agencies.
"We think that, in structuring the products, the agencies have been involved from the beginning in order to get the rating," Mr Richard told the Financial Times.
Critics claim that the agencies have issued overly positive opinions onthe creditworthiness ofmortgage-related securities that were based on under-lying assets that are now in severe distress due to the subprime meltdown.
They point to the fact that the agencies are often paid by the issuers of such securities.
Mr Richard said: "We will have a meeting some time [this month] with the credit ratings agencies to understand whether there are specific issues in relation to these structured financial products, whether there is a risk of potential conflicts of interest in these very complex financial products and in what way, for instance, the frequency of reviews of the ratings of these products differ from that of other products."
The meeting had already been planned as a follow-up to Iosco's effort with the CGFS.
"I wouldn't say we were taken by surprise by recent events but it's even more relevant in the current environment," Mr Richard said.
The meeting comes as banks and auditors are discussing how to account for losses in their leveraged lending and securities businesses due to the credit squeeze.
Mr Richard said: "We want to understand how the ratings are produced, what triggers an evaluation or an assessment of whether a rating change is necessary, and also what should be done to improve the understanding of structured financial products."
Iosco includes the US Securities and Exchange Commission, the UK's Financial Services Authority, and other market watchdogs from Japan, Australia, Canada and Hong Kong.
Question of when to cut
The world's investment banks are attempting to get to grips with the impact the market turmoil is having on their businesses, reports Peter Thal Larsen.
But senior executives are also grappling with a crucial question: at what stage should they think about cutting staff?
So far, most banks appear to be adopting a "wait and see" approach. But most acknowledge that, if current market conditions persist, widespread job losses will be inevitable.
There are several mitigating factors. First, most banks reported record profits in the first half of the year, which will provide a cushion against the second-half downturn.
Investment banks have also been able to set aside fairly large amounts for the year-end bonus pool.
Second, banks are wary about being too quick to cut back, for fear of missing out if markets recover quickly.
Finally, they are also conscious that they may need specialised bankers, especially in areas such as structured finance, to unravel some of the more esoteric structures created during the credit boom.
"There is a sense that the people who got you into this mess are the ones you need to get you out of it," says one senior London-based investment banking executive.
As a result, the banks' first step is likely to be to cut costs by limiting bonuses.
They may also encourage people to leave by paying them little or no bonus at the end of the year.
Structured finance hedge funds take fresh hit
By James Mackintosh and Paul J Davies in London
Copyright The Financial Times Limited 200
Published: September 12 2007 03:00 | Last updated: September 12 2007 03:00
Hedge funds investing in structured finance took another hit yesterday when it emerged the flagship fund of London's Wharton Asset Management had lost a quarter of its money in one month and a small Swiss-run fund had collapsed.
Wharton's Y2K Finance fund said it was suspending calculation of asset values, withdrawals and subscriptions, until December because of "current market turbulence". The fund plummeted 25.04 per cent in July, after dropping 7.3 per cent in June, as the European asset-backed securities in which it mostly invests were marked down savagely by brokers.
Meanwhile, Avendis, like Wharton specialising in structured finance products such as collateralised debt obligations, said its Enhanced Fixed Income fund had filed for liquidation in the Cayman Islands. Avendis appointed BDO Stoy Hayward to wind up the fund.
Wharton, founded by Maurice Salem and his brother in 1993, invests in property as well as running structured vehicles - including the listed Trio Finance. Trio, like many vehicles holding mainly mortgage-related securities, has seen its share price hit, falling more than 30 per cent since mid-June to $5.54.
Y2K - not thought to have US subprime exposure - is Wharton's only hedge fund forced to mark its book to market values.
Mr Salem declined to comment.
Yesterday Avendis said it was close to a deal to restructure Golden Key, its SIV-lite, one of four such deals put together by Barclays Capital that have hit trouble due to the near-closure of short-term debt markets and falls in mortgage-related investments.
Avendis, which did not return calls, is in talks with an investment bank, thought to be BarCap, for funding in place of its commercial paper programme.
Meanwhile, Pirate Capital, a US activist, is barring withdrawals from two of its four funds.
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