US sub prime meltdown consequences
The United States has seen major problems in the sub-prime market, with Bear Stearns become the biggest player to be hit by the crisis. The Wall Street banking giant shocked investors last week by acknowledging that the US sub-prime mortgage problems had left two of its main hedge funds virtually valueless. They have lost billions of dollars and are almost worthless. One of the funds was said to have “effectively no value left” and the other had “very little value left”. Previously the two funds had a combined value of $20bn (nearly £10bn). Bear Stearns bet its money on the American mortgage market, but came a cropper, as high-risk borrowers with poor credit histories began to default, leaving both funds devastated by the effects.
The meltdown has given 'serious reasons to worry', but may turn out to be a blessing in disguise if the consequences are radical re-think on credit risk, according to ratings agency Moody's Investors Service.
Earlier this year HSBC took a charge of $10m (£4.8m) on its exposure to the market. Beyond that Australian hedge fund Basis Capital Fund Management recently hired private-equity group Blackstone to help limit it problems resulting from mortgage securities.
However, Moody's believe that the subprime problems will not cause a risk to the system, but will act more as an opportunity for a 'reality check'.
Borrowing costs for non-investment grade companies have soared as a result and more than 20 US firms have cancelled bond sales because of lack of interest.
The subprime problems sparked a sell-off which has uncovered many investors ready to acquire assets at lower prices, given the 'ample liquidity'. Moody’s conclude that there is no general threat to the integrity of the financial system, but reappraisal of risk is welcome. Investor 'nervousness' will probably last until the size and location of losses is known, but that is not likely to be soon and “headline risk will probably test markets' nerves.”