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Are the markets “turning the corner” or are they simply “tacking into the wind”? Mixed messages last week give some the space to be optimistic whilst others still see things getting worse before they get better.
For the second week in succession, Wall Street investment banks have relied less on handouts from the US Federal Reserve. On March 17th, the Fed set up an emergency credit program designed to reduce the impact of the fall in liquidity, the credit squeeze, in inter-bank markets, by providing overnight borrowing facilities to investment banks, a facility previously only available to commercial banks. Unsurprisingly, at an interest rate of 2.5%, banks piled in but now lending is down to $25 billion in daily borrowings, a 25% drop on the preceding week. Richard Yamarone, of NY research firm, Argus, told Associated Press, "It's an encouraging sign that maybe the worst of the credit crisis is indeed behind us”.
Last week, Citi reported a $5.1 billion loss on 2008 Q1, mainly due to sub-prime issues, and saw its share price rise on the basis that this was half the loss in the previous quarter – no more bad news here – and the FT reported that National City Bank, the 10th biggest in the US, is successfully raising an $8 billion capital injection from a group of funds.
On the down side, Bank of America still continues to suffer, with reports, again in the FT, that it is selling off part of its share holding in China’s Construction Bank (but making a tidy profit along the way), and that it was in the advanced stage of talks to reduce its presence in investment banking by selling its prime brokerage unit to BNP Paribas.
However, those maligned derivative instruments blamed for the sub-prime crisis continue to dominate the markets with the overall market for over-the-counter derivatives, as reported by ISDA, leaping to $455 trillion at the end of 2007 with $62 trillion of that being in credit-default swaps (CDSs),
Safe harbours in sight, cross winds or still sailing into the gale?
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