Interest Rate Roundup

Monday, March 10, 2008

Same as it ever was in the markets

Guess Friday's rally was just short-covering after all. Today, we're back to more of the same, with oil prices flying, stocks trading lower, the dollar weak against the Japanese yen (a key "anti-risk" currency, and Treasuries flying (long bond futures up a point and a half recently).

What gives? How about news of large losses at private equity firms like Blackstone Group, covered by AP below?

"Private equity firm Blackstone Group LP said Monday it swung to a loss during the fourth quarter due to a write-down on its investment in bond insurer Financial Guaranty Insurance Co. and deterioration in the credit markets.

"Shares in Blackstone, which went public last June, hit an all-time low on the news. Blackstone lost $170 million during the fourth quarter, compared with earnings of $1.18 billion during the final quarter in 2006.

"Adjusted net income, which was adjusted for special revenues and expenses tied to the company's public offering, fell to $88 million, or 8 cents per share, from $808.1 million, or 72 cents per share, during the year-ago period.

"Analysts polled by Thomson Financial, on average, expected Blackstone to turn a profit of 19 cents per unit for the quarter. Analysts do not always include special charges in their estimates."
Or maybe it's ongoing, forced selling from hedge funds on margin, as chronicled in this Bloomberg story?

"The hedge-fund industry is reeling from its worst crisis in a decade as banks are now demanding more money pledged to support outstanding loans even when the investment is backed by the full faith and credit of the United States.

"Since Feb. 15, at least six hedge funds, totaling more than $5.4 billion, have been forced to liquidate or sell holdings because their lenders -- staggered by almost $190 billion of asset writedowns and credit losses caused by the collapse of the subprime-mortgage market -- raised borrowing rates by as much as 10-fold with new claims for extra collateral.

"While lenders are most unsettled by credit consisting of real estate and consumer debt, bankers are now attempting to raise the rates they charge on Treasuries, considered the world's safest securities, because of the price fluctuations in the bond market.

"If you have leverage, you're stuffed,'' said Alex Allen, chief investment officer of London-based Eddington Capital Management Ltd., which has $195 million invested in hedge funds for clients. He likens the crisis to a bank panic turned upside down with bankers, not depositors, concerned they won't get their money back."

Or maybe it's rumors of more funding/liquidity problems in the financial sector -- rumors which are impossible to prove or disprove, I should add.

UPDATE: This evening, Bear Stearns released the following statement;

"The Bear Stearns Companies Inc. today denied market rumors regarding the firm’s liquidity. The company stated that there is absolutely no truth to the rumors of liquidity problems that circulated today in the market.

Alan Schwartz, President and CEO of The Bear Stearns Companies Inc., said, “Bear Stearns’ balance sheet, liquidity and capital remain strong.”


Or maybe ... just maybe ... we're getting what we deserve? Maybe we're just getting back to a more normal environment after a multi-year binge on stupid LBO loans, stupid mortgage loans, stupid commercial real estate loans, and just all around stupid behavior? Painful? Yes. Necessary? Probably. There were some solid thoughts on this issue posted by Bennet Sedacca over at -- check out his piece here if you're interested.


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