Banks Walking A Nervous Line On Subprime Mortgage Meltdown
The Age
Friday September 7, 2007
INVESTORS are not the only ones wary of the US subprime mortgage market.
Banks are nervous, too. The evidence is contained in the soaring three-month London interbank offered rate (LIBOR), the rate at which banks lend to each other. The LIBOR this week reached an 11-year high of 7.065 per cent, showing how reluctant banks are to lend to each other (see graph below). And banks are demanding a better return for lending funds overnight, with the overnight cash rate also at high levels. In an effort to ease the problem, the Reserve Bank has stepped in. From October 8 it will buy debt backed by home loans, thus providing a market for bonds that have become unattractive to other buyers. Its intervention will provide a welcome relief for some. But the markets accepted the news with caution, recognising that there will be more fallout from the US subprime market. The S&P/ASX 200 Index lost 11.7 points, or 0.2 per cent, to 6251. And banks and investment banks were the big losers. National Australia Bank, which had been unable to refinance about $6 billion in the short-term debt market for an affiliate, fell 53? to $39.30. Babcock & Brown, which has been hit hard by the international credit crunch, fell 52? or 2.2 per cent to $23.47. And Macquarie Bank lost 85?, or 1.2 per cent, to $71.19. QBE Insurance fell 26? to $34 and Insurance Australia Group lost 9?, falling to $4.87. Speaking at a Melbourne Centre for Financial Studies seminar, British-based Fortune Group investment director Richard Tarvin said he and his colleagues removed almost all credit exposure in their portfolios early last year because of the risk. "They were making triple-A bonds out of absolute garbage," he said. Fortune invested in the Paulson Credit Opportunities Fund, a fund that was shorting the US subprime mortgage market. So far this year, that fund has produced returns of better than 300 per cent, benefiting as the subprime mortgage market disintegrates. Mr Tarvin said Fortune also invested in hedge funds around the world, with a particular interest in three of the BRICS nations - Brazil, Russia and China. Funds in the other BRICS countries, India and South Africa, did not yet meet Fortune's investment criteria, he said. Some Australian investors, though, have gained exposure to the Indian market through vehicles such as the recently listed India Equities Fund. Fortune chief executive John Pereira said that between April 4 and June 30, the conservative fund had produced an annualised return of 35 per cent. Back in Australia, Woodside Petroleum yesterday went against the trend, gaining 90?, or 2 per cent, to $46.10 after agreeing to supply PetroChina with natural gas for 15 to 20 years, starting in 2013 to 2015. Higher crude oil, which reached $US75.73 a barrel, helped lift Santos 11? to $12.99. Resource companies BHP Billiton and Rio Tinto also rose, benefiting from renewed speculation about a potential takeover. BHP gained 46? to $38.90 while Rio added $3.30 to its share price to hit the tantalising $99 mark. The Australian dollar improved as European markets opened last night on a more upbeat note. It reached a high of US82.76? in early trade.theage.com.au? To see up-to-the-minute exchange rates visit markets.theage.com.au/apps/mkt/forex.ac
© 2007 The Age