Why Bear Stearns’ collapse means you can’t get a mortgage

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The collapse of Bear Stearns had a predictable impact on stock markets across the world yesterday. But few suffered as badly as the UK market.

The FTSE 100 dived by more than 200 points to close at 5,414. Meanwhile, the pound had its worst day since “Black Wednesday”, when it was thrown out of the exchange-rate mechanism. It shed almost 2% against a basket of other currencies, to end the day at its lowest level since January 1997.

In fact, the pound even fell against the dollar, unlike almost every other major currency. The horrible reality is that the markets think that the UK is in almost as much trouble as the US…

The Dow Jones actually managed to end higher yesterday, up 20-odd points by the close, as traders gradually calmed down after no other banks went to the wall. Fear had centred on Lehman Brothers, which has a similar business model to Bear Stearns, but it seems that Wall Street rallied round the group to avoid a run on the bank igniting – for now at least.

Of course, it’s saying something when you can argue that Lehman investors might have been relieved that the company’s stock ‘only’ closed down by around 20%. Other financials such as Man Group spin-off MF Global dived by more than 50%, on little more than fear and rumour. But the real carnage was happening this side of the Atlantic, here in the UK.

Which UK banks are the biggest cause for concern?

British banks took a pounding once again, with HBOS, Britain’s biggest mortgage lender, the top faller, down 13%. As Alex Potter of Collins Stewart told The Telegraph: “If people can pull liquidity out of Bear [Stearns] at the rate they did, all bets are off on the rest of the banking sector.” The main reason people are worried about HBOS in particular is that it has the highest ratio of money raised from wholesale markets, compared to customer deposits, at 177%, according to The Telegraph.

That still compares very favourably to Northern Rock, which was on 345%. But HBOS also has £7.1bn of exposure to Alt-A mortgages in the US, which are just above sub-prime. If the US property market continues to weaken – as seems very likely – those assets are vulnerable to some nasty potential write-downs.

But HBOS is far from being the only bank that investors are worried about. It wasn’t thought to be among the desperate lenders clamouring for money from the Bank of England yesterday, for one thing. The Bank of England auctioned off £5bn of short-term loans at 5.25% yesterday, but banks requested almost five times that amount, £23.6bn. The move came as the inter-bank lending rate spiked up to 5.59%, in the largest rise in three months.

Incidentally, if you’re worried that the bank you hold an account with could be at risk, you can read James Ferguson’s article on where the safest places to park your savings are here: How to spot the riskiest banks.

The big borrowing squeeze

All of this means that lending for the man and woman on the street isn’t going to get any cheaper. If banks can’t get the money they need at a rate they can afford, then what hope is there for the likes of you and me?

Life is clearly already getting much harder for entrepreneurs in the UK. Barclays reckons that half a million businesses closed their doors for good last year. That’s up 8% on 2006, and meant a closure rate of 17% of all businesses with bank accounts. The last time that sort of rate was reached was during the last recession in 1991-1993.

Personal loan rates have risen from an average of 14.4% on a £1,000 loan before the crunch, as The Times puts it, to 18.9% now. And mortgage providers are pulling their products left, right and centre – Scottish Widows has pulled all its two and three year fixed rate deals, and all of its buy-to-let range, says The Telegraph, while Halifax jacked up the rates on some of its tracker deals by as much as 0.3 percentage points. It makes a mockery of all the feeble articles being printed in the weekend property supplements about ‘a spring recovery’ in the property market.

Banks in the UK are already suffering. What will happen when the UK housing crash gets fully underway? No wonder traders are bailing out of sterling.

Turning to the wider markets…

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Asian markets reverse losses

London‘s FTSE 100 index closed down 217 points at 5,414 yesterday, and the broader indices were also sharply lower. For a full market report, see: London market close

On the Continent, the Paris CAC-40 fell 161 points to close at 4,431, its lowest level since November 2005. Over in Frankfurt, the DAX-30 lost 269 points to end the day at 6,182. Siemens was the biggest faller on Germany‘s benchmark index yesterday, down over 17% after issuing a profit warning.

Across the Atlantic, the Dow Jones recovered from the steep losses recorded earlier in the day – when it slumped by as much as 200 points – to end the day with modest gains, up 21 points at 11,972. Shares in JP Morgan Chase led the industrials index higher with gains of over 10%. The broader indices closed in the red, however. The S&P 500 was down 11 points at 1,276, and the tech-rich Nasdaq was 35 points lwoer, at 2,177.

In Asia, the Japanese Nikkei broke its three-day losing streak today, adding 176 points to close at 11,964. In Hong Kong, the Hang Seng reversed earlier losses to end the session at 21,384, a 300-point gain.

Gold jumps 3% to new record

Crude oil was trading at $106.41 a barrel this morning, having slumped from an all-time high of $111.80 to close at $105.68 in New York last night. In London, Brent spot had risen to $103.56.

Spot gold was at $1002.50 this morning, below yesterday’s record high of $1,030.80. Silver fell to $20.06, and both platinum and palladium were also trading below their recent record highs.

Turning to forex, sterling had firmed against the dollar and was last trading at 2.0108, and was also at 1.2738 against the euro. And the dollar was at 0.6333 against the euro and 97.70 against the Japanese yen.

And in London this morning, insurer Legal & General announced a 69% fall in second-half profit. L&G blamed an unexpected rise in life expectancy charges and falling margins. CEO Tim Breedon warned that with the full impact of the credit crunch as yet unclear, it would be difficult to forecast earnings for the year ahead. Shares were down by as much as 8.6% in early trading.

Our recommended articles for today…

Danger: don’t get burned by this soft commodity
– We all know that growing populations and rising affluence are putting soft commodity supplies under pressure, but don’t get too complacent – within the supercycle there will always be ups and downs. And remember too that this year’s ‘hot investment’ can quite easily become next year’s harvest. For more on an overhyped commodity to be wary of, see: Danger: don’t get burned by this soft commodity

How to beat the crisis
– The US government has been fudging its economic statistics in order to convince the public that conditions are rosier than they look – and to implement secret tax increases. To find out why things may be even worse than they look, read: Just how bad is the US recession?