박재훈투영인
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5 months ago
Mounting Fears Shake World Markets As Banking Giants Rush to Raise Capital(Sept. 18, 2008)
Fear coursed through the U.S. financial system on Wednesday, as hope for a resolution to the year-old credit crisis faded.Stocks tumbled, concern grew about which financial firm would fall next, and investors rushed toward the safe haven of government bonds in the wake of the collapse of Lehman Brothers Holdings Inc. and the crisis at insurer American International Group.The market turmoil is doing more than inflicting losses on investors. Borrowing costs for U.S. companies have skyrocketed, and the debt markets have become nearly inaccessible to all but the most creditworthy borrowers.The desperation was especially striking in the market for U.S. government debt, long considered the safest of investments. At one point during the day, investors were willing to pay more for one-month Treasurys than they could expect to get back when the bonds matured. Some investors, in essence, had decided that a small but known loss was better than the uncertainty connected to any other type of investment.That's never happened before. In a special government auction on Wednesday, demand ran so high that the Treasury Department sold $40 billion in bills, far beyond what it needed to cover the government's obligations."We've seen crisis. We've seen recession. But we've not seen the core of the financial system shaken like this," says Joseph Balestrino, a portfolio manager at Federated Investors. "It's just crazy."A 449-point selloff took the Dow Jones Industrial Average to its lowest level in almost three years, leaving it 23% below where it stood a year ago. Volume on the New York Stock Exchange was the second highest in history, falling just shy of the record set on Tuesday. The VIX, a widely watched measure of market volatility that is often referred to as the "fear index," hit its highest level since late 2002.In Europe, stock markets lost roughly 2% of their value. In Russia, the scene of recent massive declines, trading on the country's major exchanges was halted for the second day in a row, this time only an hour and a half into the session. Gold prices rose 9% to $846.60 an ounce amid the global turmoil. In early trading Thursday, Tokyo stocks were down 3.2%, among other declining markets in the region."Forget about retail investors, all the pros are scared," says one broker. "People have no idea where to put their money."For now, "if you have cash, you're going to put it in the short-term, most liquid stuff you can," says Steve Van Order, fixed-income strategist for Calvert Asset Management.Adding to the fear was a loss in a prominent money-market fund, the Reserve Primary Fund, which held Lehman Brothers debt. It was the first time since 1994 that such a fund, which is supposed to be as safe as a bank account, had lost money. The loss was made worse by a run on the fund. Over two days, investors pulled more than half of their assets from the fund, once valued at $64 billion."This is a panic situation" in the bond markets, says Charles Comiskey, head of U.S. government-bond trading in New York at HSBC Securities USA Inc.Riskier assets were sold off. Yields on bonds issued by financial companies hit a record high of about six percentage points above U.S. Treasurys. In the market for credit-default swaps -- essentially insurance against default on assets tied to corporate debt and mortgage securities -- fears increased on Wednesday about whether counterparties would be able to honor their agreements. Investors tried to reduce their exposures to two more big players in the market, Goldman Sachs Group Inc. and Morgan Stanley. That sent the cost of protection on both Wall Street firms soaring to new highs.In the stock market, the pressure on financial firms continued, with Morgan Stanley stock dropping 24% and Goldman Sachs shares losing 14%.Investors say the government takeover of AIG and Lehman's bankruptcy filing are evidence that the situation is grimmer than all but the most pessimistic had expected. Problems have spread from complex debt markets tied directly to the housing market into plain-vanilla corporate bonds."Another front is opening," says Ajay Rajadhyaksha, head of fixed-income research at Barclays Capital.Some people fear that the dwindling ranks of investment banks, coming at a time when commercial banks are pulling back on their own use of capital, will prolong the credit crunch."It's unclear who is going to be a credit provider going forward, and if having fewer credit providers means higher costs of borrowing going forward," says Basil Williams, chief executive of hedge-fund manager Concordia Advisors.Ordinarily, bondholders are better protected from losses than stock investors. But the events of the past two weeks have shown that they are vulnerable, too. The Federal Reserve's rescue of AIG doesn't protect the company's bondholders. That's because the deal, which consists of a high-priced loan to the company from the government, requires AIG to pay the Treasury before current bondholders. If AIG can't raise enough cash by selling assets, bondholders won't be fully repaid.As a result, despite the Fed lifeline, some AIG debt is changing hands at just 40 cents on the dollar, less than half of the price one week ago. Now that Lehman has defaulted on its debt, its senior bonds are worth as little as 17 cents on the dollar, traders say.That's spilled over to other financial names seen as under stress. Bonds of Morgan Stanley are trading at around 60 cents on the dollar. Goldman Sachs's bonds are trading at prices in the range of 70 cents on the dollar.As bond prices dropped, their yields rose. The spread between yields on corporate bonds and safe U.S. Treasurys have blown out to the widest levels traders have seen in years. On Wednesday, yields on investment-grade corporate bonds were more than four percentage points higher than comparable Treasury bonds, according to Merrill Lynch. Junk bonds ended the day more than nine percentage points over Treasurys, approaching the 2002 high of 10.6 percentage points, according to Merrill.Short-term debt markets, where companies borrow overnight or in periods up to one year, have dried up. The money-market-fund managers who normally buy such short-term debt have suffered losses on their holdings of debt in Lehman Brothers and other financial institutions.If companies can't borrow in the short-term debt markets, they may be forced to draw down on their revolving credit lines, yet another drain on banks' dwindling capital.The Lehman bankruptcy also pressured the market for leveraged loans, which are used by private-equity firms to finance buyouts. When the firm attempted to sell some of its loan holdings earlier this week, prices dropped toward 85 cents on the dollar, according to Standard & Poor's Leveraged Commentary & Data.The damage has gone beyond banks and brokerages. Ford Motor Credit Co., the finance arm of Ford Motor Co., paid 7.5% for Tuesday-night overnight borrowings, says one trader. Typically, the rate for such debt would be about one-quarter percentage point over the federal-funds rate, which is currently 2%, he says. Even for companies considered of the safest credit quality, the cost of overnight debt is rising. General Electric Co. was forced to pay 3.5% for overnight borrowing on Wednesday, the trader says. In normal times, GE, which has the highest debt rating, would have to pay the equivalent of the federal-funds rate."There's no evident catalyst for ending the pain," says Guy Lebas, chief fixed-income strategist at Janney Montgomery in Philadelphia.
