Money Wise

World Bank Bail out


September 16, 2007

World’s banks hit for $30billion in credit crunch

THE world’s investment banks are to reveal a $30 billion (14.9 billion) hit from bad debts as they unveil results that give the first real insight into the impact of the debt crisis.

City analysts predict the banks will have to write down as much as 10% of the $300 billion of leveraged loans currently agreed but not yet syndicated when they report third-quarter results to the market.

Banks are also expected to announce further hefty provisions to cover their exposure to commercial paper, including the so-called conduits and SIVs, a type of highly leveraged investment fund. In some cases profits for the third quarter could have been almost wiped out by a combination of exposure to bad debts and complicated commercial paper.

Kian Abouhossein, banking analyst at JP Morgan, said: “The hits will essentially mean that some investment banks will have made almost no money over the last quarter. Profits will be close to zero.”

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In an interview to be broadcast tonight in America, Alan Greenspan, former chairman of the Federal Reserve Board, said that when he was in charge he “didn’t really get” how the boom in sub-prime lending might hurt the economy.

Greenspan said in the interview with CBS’s 60 Minutes that while he was aware of lax lending standards in the sub-prime market, “I had no notion of how significant they had become until very late. I really didn’t get it until very late in 2005 and 2006 [as he was about to leave office].”

Attention in the markets will switch this week to the Federal Reserve and its decision on interest rates on Tuesday. While the Fed is widely expected to announce a cut in the key Fed funds rate, and possibly an accompanying reduction in the discount rate, analysts are split on whether it will be a quarter or half-point reduction.

“There seems little doubt that the Fed will cut the funds target at least 25 basis points,” said Christopher Probyn, chief economist at State Street Global Advi-sors. “We believe that against the backdrop of financial market, housing market and possibly labour market fragility, 50 basis points could do much good and little harm.”

Nick Stamenkovic, an economist with RIA Capital Markets, said that American interest rates would end the year 0.75 points lower than now, at 4.5%.

This will put pressure on the Bank of England to reduce interest rates in Britain. Analysts expect inflation to have stayed close to July’s below-target rate of 1.9% when the August statistics are released on Tuesday.

“We expect UK rates to be cut before the end of the year,” said Robert Barrie, an economist at Credit Suisse.