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US bank bail-out panics markets

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  • US bank bail-out panics markets

    US bank bail-out panics markets

    Scott Murdoch | March 17, 2008

    THE rout of the Australian share market is set to worsen after one of the largest investment banks in the US came close to collapse, sparking fears that a major world bank could fall victim to the deepening credit crisis.

    The share price of Bear Stearns, the US's fifth-largest investment bank, was halved in New York trading after it had to be rescued with emergency finance from the US Federal Reserve and rival JPMorgan.

    The unprecedented lifeline sent panic through stock markets and major financial centres around the world as other banks raced to clarify their exposure.

    In light of the Bear Stearns troubles, Wayne Swan was briefed over the weekend by Treasury officials in Canberra on the potential for the international financial contagion to spread to Australia.

    The Treasury is understood to believe Australia's major trading banks are well capitalised and local institutions are not at risk of repeating the Bear Stearns crisis.

    "The Treasurer has been receiving regular briefings from our regulators, who continue to monitor developments on global financial markets very closely," Mr Swan's spokesman said.

    The Bear Stearns crisis has prompted George W.Bush to meet today the administration's financial markets advisory panel of Treasury secretary Hank Paulson and Federal Reserve chairman Ben Bernanke.

    Mr Bush said that while the US economy was slowing he did not want authorities to "over-correct" as that could worsen the situation.

    The Australian regulators, the Australian Prudential Regulatory Authority and ASIC, appear unconcerned about the growing liquidity crisis in the US banking system.

    The major investment banks yesterday insisted they had not been approached over the weekend for assurance that their liquidity positions remained strong.

    The largest investment bank in Australia, Macquarie Group, said it held three times the amount of capital in its reserves than the amount required by the regulators.

    "Every bank regularly reports to APRA on its liquidity position," Macquarie spokesman Paula Hannaford said.

    "APRA imposes on all its regulated banks certain liquidity management and reporting obligations and we comply with those requirements at all times."

    The banking sector crisis has emerged as the majority of economists believe the US is already in recession after lower retail sales and the labour market contraction.

    Finance Minister Lindsay Tanner said the US situation could have ramifications for the Australian economy, despite most economists believing China will provide a robust safeguard.

    "The American situation is worrying, it's concerning, nobody knows what will unfold," Mr Tanner said. "We are watching it very closely.

    "But we need to remember that we've got other international pressures that are coming in the other direction and they are very powerful."

    The Bear Stearns shock establishes a negative lead for the Australian stock market when it begins trading this morning.

    Early indications from the futures market showed the S&P/ASX200 would open down by 36 points, but analysts believe a sharp loss of at least 70 points will occur. The Australian share market has been one of the worst performing in the world recently, losing more than 20 per cent since the start of the year.

    The fall of the domestic market is double the 10 per cent loss recorded on the Dow Jones in New York, despite the sub-prime saga starting on Wall Street.

    Suncorp chief executive John Mulcahy told The Australian yesterday that domestic banks had become caught up in the sour sentiment towards international financial stocks.

    Investors were now fearful of the potential for banks with a high number of bad debts and loans on their books to be punished.

    "Business starting to default on their loans - that is the concern," Mr Mulcahy said. "The cost of the credit crunch is that good businesses are starting to underperform.

    "Australian corporate balance sheets are in good shape. The bears out there have been saying that we are going to see bad debts kick up. But I don't think we are going to see a significant disastrous event to any extent."

    Mr Mulcahy said there was a strong chance that each of the retail banks could again move lending rates higher, independently of the Reserve Bank.

    "It really depends on the cost of credit overseas that the Australian banks access," he said. "If it continues to be expensive, then it will have to be passed on."

    Banking stocks on the global financial markets were hammered across the weekend, with Lehman Brothers falling by as much as 11 per cent on fears it held more sub-prime trouble than initially thought. Lehman operates in Australia though its purchase last year of Grange Securities.

    AMP Capital chief economist Shane Oliver said the Australian market was likely to abolish the gains made last week, when investors were buoyed by a new funding package of $US200 billion announced by the Federal Reserve in the US.

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

  • #2
    Latest follow up from the NZ Herald:

    JPMorgan Chase & Co has today bought stricken rival Bear Stearns at the bargain-basement price of around US$236 million.

    Bear Stearns' cash reserves were drained by fleeing customers on Thursday, and on Friday the bank secured emergency funding from the Federal Reserve, extended through JPMorgan.

    The deal values New York-based Bear Stearns, which has 14,000 employees, at just US$2 a share, compared with US$30 at the close on March 14.

    Under the deal, the Federal Reserve will provide special financing and has agreed to fund up to US$30 billion of Bear Stearns' "less liquid" assets.

    Bear Stearns' chief executive, Alan Schwartz, said in a statement the deal represented the "best outcome for all of our constituencies based upon the current circumstances."

    JPMorgan's chief executive Jamie Dimon said in a statement: "Bear Stearns' clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns' counterparty risk."

    The bank said the deal was expected to close by the end of the second quarter and would be accretive to JPMorgan's annual earnings.