World Economic News
Bank Panic Uncovers Fantasy Bonds
Nov. 21 (EIRNS)"Covered bonds" are very much uncovered this afternoon in the worsening dollar crash, and the entire European market for trading these asset-backed securities among banks, has been shut down for a week, in another grave sign of a gathering bank panic.
European banks were ordered by the European Covered Bond Council to cease trying to market these bonds to each other, at least until Nov. 26. Reuters reports that this action became necessary after the price of buying derivatives contracts to insure these securities against default, shot upwards, in extremely volatile conditions. "In light of the current market situation and in order to avoid undue over-acceleration in the widening of [default] spreads," the Bond Council said it had to act.
Covered bonds are asset-backed securities created from either mortgage loans, or municipal and state loans. Unlike mortgage-backed securities (MBS), the bank that owns these loan assets doesn't sell them, but rather issues its own bonds with the loans as collateral. So, covered bonds are bank debt (bonds of banks, on their own credit) and now the banks of Europe are unable to sell their own bonds, even to each other. The interbank-lending "freeze-up," in effect since August, has just gotten worse.
Rats Jump the 'Covered Bond' Ship
Nov. 22 (EIRNS)A third bank, Abbey National, the British arm of Spain's Banco Santander, has been forced to pull out of the sale of the mortgage-backed bonds called "covered bonds." It joins Allied Irish Bank and Ahorro y Titulazicon (Spain), which also ran into trouble with their covered bonds trade.
A source with the German Association of Covered Bonds told EIR that the problem emerged mainly in Spain and Britain, where private investors were scared out of those bonds. Many of these bond-holders apparently came under acute pressure in the most recent period to get liquidity by selling such bonds, but the banks have also been having problems finding buyers. Eurohypo, the real estate branch of Commerzbank, reports traded volumes up to 20% below the average volumes traded in the uncovered bonds market in 2006. The market trading volume in this sector usually is several hundred million euros every day, but that's no longer the case, the source said. And, there is a trend among investors to shift from these covered bonds to state bonds, which look like a safer investment.
'Massive Hole' Discovered in U.K.'s Northern Rock
Nov. 23 (EIRNSAn examination by the Guardian newspaper of the books of the British mortgage lender Northern Rock revealed "a massive hole" in its assets, as they discovered that 53 billion pounds of its mortgage portfolio is sitting in an offshore trust called Granite Master Issuer, on the Island of Jersey. This calls into question whether Northern Rock will be able to pay back the Bank of England the 24 billion pounds it has borrowed. In addition, the BoE has extended a guarantee of 14 billion pounds to depositors. Apparently it is this 53 billion held in Granite that has been used to finance new credit.
The Guardian quotes Richard Murphy, a forensic accountant, as saying, "This should be a concern for the Bank [of England] and Treasury particularly if the emergency loans have actually been used to finance the activities of Granite rather than Northern Rock. It would be harder for the government to secure preferential treatment over other creditors if it is shown that the money was actually for Granite's benefit."
Meanwhile, a report from the Bank of England and the Treasury asserts that if Northern Rock defaults on its 24 billion pounds in BoE loans, it could "drive a coach and horses" through the public financing and throw the budget into a huge deficit. In another sign of the collapsing British housing market, Kensington Mortgages, which has specialized in subprime mortgages, announced that as of today it will no longer offer subprimes. Kensington is owned by the South African Investec Bank.
Now, Companies That Insure Bonds Are Going Under
Nov. 23 (EIRNS)EIR warned you on Aug. 12, 2007 that "monolines," the insurance companies that insure bonds, including mortgage-backed securities and municipal bonds, would be going under in the financial collapseand now the bailouts are beginning to publicly surface.
Banque Populaire and Caisse d'Epargne, which control the French lender Natixis, are to inject $1.5 billion into the CIFG, a monoline insurer for the French bank Natixis, in a desperate attempt to keep the insurer's credit rating up at the AAA level, the London Independent reports today.
Meanwhile, Bloomberg reports that the New York-based, Monoline Financial Guaranty Insurance Co. (FGIC) was given three weeks by the Fitch Ratings agency to come up with proof that it should not have its rating reduced. FGIC is jointly owned by PMI Group, Inc., the U.S.'s second-largest mortgage insurers; The Blackstone Group; and the Cypress Group. It insures $315 billion worth of bonds, including $30 billion of mortgage-backed bonds and $25 billion of collateralized debt, but only had $5 billion in capital reserves as of Sept. 30. Fitch says the FGIC, the fourth-largest debt guarantor, is the most vulnerable in the industry.
The monoline insurers are now backing $2.4 trillion of securities whose own ratings will suffer if the monolines' ratings go down.