Us Sub Prime Panic Causing Global Jitters
The recent Bull Market in Stock Markets around the world had a brief wake up call last week lead by US Markets heading south in a big fashion on Friday. The Dow Jones lost more than 100 points on Firday alone to close at 13,360.
As reported last week, one of the major causes of this attack of the jitters was the the gradual realisation that the US may be in for another Hedge Fund collapse. This time there are two funds involved, both managed by Bear Stearns and it looks as if a $3.2 billion rescue package may be only enough to save just one of them and the other may be thrown to the wolves - so to speak. The root problem in all of this is the growing perception that the US sub prime market in Housing may be behind the downfall. Bad bets on this market appears to be causing casualties across the board with some institutions taking bigger hits than others.
Trying to hope that it might just sort itself out and go away doesn’t appear to gathering much ground amongst seasoned observers.
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So what exactly is the problem - and could this be the start of something bigger?
Two of Bear Stearns’ hedge funds - the High-Grade Structured Credit Fund and the High-Grade Structured Credit Enhanced Leverage Fund - are experiencing problems. In essence, the funds made some bad bets on the US housing market that appear to have backfired on them and now they are causing problems. Other lenders have now had a crisis of confidence and are asking for monies back and the Hedge Fundsdon’t have the cash - hence the panic.
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The troubles emerged when Bear Stearns stopped investors in the second fund (the ‘enhanced leverage’ one) from pulling money out - which is, as Bloomberg put it, “the first sign of an impending collapse.” So naturally, “the investment banks who had lent money to the Bear Stearns hedge funds said – ‘We want our money back. And if we can’t get our money back right away, we may seize collateral and sell it,’” said Janet Tavakoli of Tavakoli Structured Finance.