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The US subprime mortgage collapse has already claimed plenty of scalps in America, with scores of mortgage lenders shedding thousands of jobs as the industry implodes.
And now the redundancies are starting to hit the City too – and while the numbers are few, the profile is much higher.
This week Royal Bank of Scotland shed a quarter of the more than 20 staff on its collateralised debt obligations (CDO) team. Deutsche Bank has shut down part of its credit trading department, losing up to seven staff in the process.
But probably the most high profile exit has been from Barclays. And that‘s not the only trouble the bank‘s been having recently…
Barclays is having a tough time of it recently. First Edward Cahill, the head of CDOs at Barclays Capital, handed in his resignation last week, raising fears about the bank’s exposure to ‘Structured Investment Vehicles’, or SIVs, which have recently caused serious problems at German regional banks Sachsen and IKB.
The lack of clarity and official announcements around the situation have lead to all sorts of speculation about Barclays’ exposure to such funds – though recent reports have suggested its maximum losses could be as low as £75m.
Now the bank seems to be being plagued with technical problems when it comes to balancing its books.
Earlier this month, rumours flew around the City after an unknown bank borrowed £314m (a tiny amount by banking standards) from the Bank of England’s emergency lending fund. The BoE lends this at a penalty rate – currently 6.75% – so it really is a lender of last resort.
The finger was immediately pointed at Northern Rock, which has attracted a lot of negative attention after recent profit warnings and concerns over rising costs due to its particularly heavy reliance on wholesale markets to fund its mortgages.
However, in that case it turned out that Barclays had in fact been forced to borrow the money. Now let’s put this into perspective – this happens regularly. The banks need to balance their books at the close of play every day, and while they’ll normally do this by borrowing money from each other, sometimes they do have to draw on the BoE – it’s basically an administrative issue.
In this case, a miscommunication late in the day between Barclays and HSBC resulted in Barclays having to borrow £314m from the Bank – no big deal.
But yesterday, a mysterious borrower asked the Bank to stump up £1.6bn. And today we find again, that it was Barclays. There’s an equally innocent excuse – this time there were technical problems with the electronic settlement system CREST, report Edmund Conway and Philip Aldrick in The Telegraph.
Barclays tells the paper: “Had there not been a technical breakdown, this situation would not have occurred. At the end of the day, there was excess liquidity in the money markets, where bank reserves were larger than bank borrowings. There are no liquidity issues in the UK markets. Barclays itself is flush with liquidity.”
But traders also questioned by the paper, “were surprised by the excuse… if technical problems were really the culprit, then it would have affected far more institutions.”
It could all be just a run of bad luck, exacerbated by the current havoc in the markets. But it’s intriguing to say the least. We’ll certainly be keeping a close eye on the Bank’s emergency lending window in the weeks to come – and on Barclays.
Turning to the wider markets…
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In London, the FTSE 100 added 79 points to close at 6,212 yesterday as energy stocks provided support. BG Group was the day’s best performer on a combination of positive broker comment and the ongoing strength of the crude price. For a full market report, see: London market close.
Elsewhere in Europe, Suez led the CAC-40 to a close of 5,592 – a 72-point gain – in Paris. And in Frankfurt, the DAX-30 closed 80 points higher, at 7,519.
Across the Atlantic, stocks closed broadly lower after a volatile day’s trade as investors awaited a firm signal on interest rates. The Dow Jones closed 50 points lower, at 13,238. Wal-Mart led the index down after Merrill Lynch switched to a sell recommendation on the retailer. The tech-rich Nasdaq was 2 points higher, at 2,565. And the S&P 500 was down 6 points, at 1,457.
In Asia, stocks rallied on news that President Bush is to make an announcement on the subprime market later today (see below). The Japanese Nikkei was up 415 points to 16,569. And the Hong Kong Hang Seng was 499 points higher, at 23,984.
Crude oil remained above the $73 mark – at $73.62 this morning – and Brent spot was at $70.93 in London.
Spot gold had risen to $667.40 today – from $664.70 in New York late last night – on news of a strike at a mine in Papua New Guinea. And silver had risen to $11.89.
In the currency markets, the pound was at 2.0126 against the dollar and 1.4743 against the euro. And the dollar was at 0.7321 against the euro and 116.18 against the Japanese yen.
And in the US later today, President George Bush is expected to announce plans to help subprime borrowers avoid defaulting on their mortgage payments. An anonymous official said that the Federal Housing Administration would be able to guarantee loans for deliquent borrowers to allow them to avoid foreclosure. Defaulting borrowers are the root cause of the current stock market turmoil, as missed payments have plunged banks and investment firms into financial difficulty.
And our recommended articles for today…
The real story about the US Dollar and gold
– Think that gold will make its next dramatic move when the dollar weakens further? Think again. Having looked at back at what the dollar was doing during some of the most spectacular gold price moves, Ed Bugos reveals the true relationship between the US dollar and gold here:
The real story about the US Dollar and gold
How China fell in love with Louis Vuitton
– China’s extraordinary rate of growth has led to the creation of a middle class eager to show off its new-found wealth. And the best way to do so? With designer watches, ‘it’ bags and premium champagne. We pick two of the stocks most likely to benefit from China’s luxury goods boom:
How China fell in love with Louis Vuitton