Northern Rock, Carlyle, now Bear Stearns

Economic growth, Financial Events, Leverage

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We have now seen 3 financial disasters in a matter of days:

Northern Rock, the UK’s 5th largest mortgage lender, was nationalised last month, after failing to secure sufficient funds to continue lending.
Carlyle, one of the world’s largest private equity firms, saw their $16.6bn mortgage fund default on Thursday, due to its excess leverage.
Bear Stearns, the 5th largest US investment bank, had to be rescued by the US Fed/JP Morgan over the weekend, as it too hit a liquidity crisis.

Bear were the subject of one of my first postings in the blog, last July, when I commented that its hedge fund troubles sent ‘a chill down my spine’. My fears have been amply justified by subsequent events. As the BBC’s business editor, Robert Peston, said on Friday, “the rescue of Bear Stearns demonstrates that the worst of the global credit crunch is not yet behind us.” He added ‘that if Bear Stearns had been allowed to collapse, it could have put the whole financial system at risk’.

And although stocks rallied globally on Thursday, after S&P were reported as saying the end of subprime writedowns was ‘now in sight’, it is clear from reading the full S&P statement that their real views are quite different:

‘We believe that any near-term positive impact of reducing subprime risk in the financial system via increased disclosure and write-downs will be offset by worsening problems in the broader U.S. real estate market and in other segments of the credit markets. A major repricing of credit risk is taking place across the debt markets, with credit spreads having further widened in most segments since the beginning of 2008’

As I have noted since September, the whole zeitgeist is changing in financial markets, with lenders now focused on ‘return of capital’, rather than ‘return on capital’. Clearly, they don’t like the prospects they see ahead, and who can blame them? But with housing markets so important to the chemical industry, it is hard to believe that we will avoid major impact from the financial disasters now taking place.

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