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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (9897)	9/4/2008 1:43:50 PM
From: Hawkmoon	Respond to of 33421

Geezus Weeps!! Will someone please sue, and/or short, the credit rating companies into oblivion?? Eenie, meenie, miny moh.. fake the ratings, collect the dough.. Hawk

To: John Pitera who wrote (9897)	9/4/2008 3:48:53 PM
From: John Pitera	Read Replies (3) \| Respond to of 33421

CDS Bank Bond Risk Soars to Five-Month High as ECB Tightens Lending By Abigail Moses Sept. 4 (Bloomberg) -- The cost of protecting European bank bonds from default rose to the highest in five months after the European Central Bank tightened its criteria for lending. The ECB will charge banks more to borrow by reducing the amount it lends to as little as 16.4 percent below the face value of collateral pledged, President Jean-Claude Trichet said at a press conference in Frankfurt today. *Credit-default swaps on the Markit iTraxx Financial index* of subordinated debt for 25 European banks and insurers jumped 12 basis points to 177, the highest since April 1, according to JPMorgan Chase & Co. prices at 6 p.m. in London. ``Increased collateral requirements are going to make it harder for all banks that use the facility,'' said Matthew Maxwell, a credit strategist at Societe Generale SA in London. ``It will be toughest on banks using riskier types of collateral.'' The ECB is changing its requirements to head off abuse by financial institutions. The ECB accepts a broader range of collateral for loans than the Federal Reserve or the Bank of England, including bonds with credit ratings five levels below AAA and asset-backed securities, prompting some firms to create bonds specifically to use as collateral to borrow from the ECB. Central banks made borrowing easier after firms stopped lending as losses from subprime mortgage defaults in the U.S. caused credit markets to seize up worldwide. Banks have lost or written down $509 billion since the credit crisis began last year, with Europe accounting for $230 billion. `Gaming the System' ECB council member Yves Mersch said in an interview last month that the central bank is concerned that some financial institutions are ``gaming the system.'' The ECB lent 467 billion euros ($670 billion) last week to banks with operations in the 15-country euro area. Lenders in Spain have almost tripled borrowings from the Frankfurt-based ECB in the past year, the fastest increase in Europe, according to data from the countries' central banks. Spanish banks have stored up 89 billion euros of asset-backed securities to pledge as collateral, according to UniCredit SpA. Bonds backed by mortgages and other assets accounted for 18 percent of the ECB's loan collateral at the end of 2007, up from 4 percent in 2004, Fitch Ratings data show. Sydney-based Macquarie Group Ltd. sold bonds backed by Australian consumer loans in June through a special-purpose company in Ireland, enabling investors to use the notes as collateral to borrow from the ECB. Haircut The new rules on collateral, which will take effect from February, will apply a discount of 12 percent on asset-backed bonds, up from as little as 2 percent, Trichet said. Bonds that don't trade or are difficult to value will have an additional so-called haircut of 5 percent, Trichet said. The ECB will lend 5 percent less than the face value of unsecured bank bonds. The change is intended to ``optimize'' the ECB's risk control, Trichet said. The central bank has the flexibility to limit or exclude certain types of collateral ``at the level of individual counterparties,'' he added. The ECB will no longer accept securities in which the issuer bank or a related party is *providing support to the transaction through currency swaps or emergency backstop loans*, Trichet said. It will also require bonds to be publicly rated and for the rankings to be explained in published reports. The securities should have new reports from rating firms every three months. ``The losers are the banks retaining bonds to raise cheap collateral, now the cost will be higher,'' said Luca Jellinek, a London-based strategist at Royal Bank of Scotland Group Plc. ``The winners are the rest of the euro system whose collateral has been edged out by retained ABS.'' Shares Slump Shares of Banco Santander SA, Spain's biggest lender, slid 4 percent and Banco Espanol de Credito SA, known as Banesto, retreated 4.2 percent. Credit-default swaps on the subordinated debt of Santander rose 1 basis point to 168. Contracts on Banco Bilbao Vizcaya Argentaria SA, Spain's second-biggest lender, increased 2 to 168, CMA prices show. Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates a decline in the perception of credit quality; a drop signals the opposite. A basis point on a credit-default swap contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Default swaps on BNP Paribas SA, France's biggest bank, rose 5 basis points to 121, and Societe Generale increased 5 to 155, according to CMA Datavision. Contracts on the subordinated debt of UniCredit SpA, Italy's biggest bank, climbed 6 basis points to 141, CMA prices show. UBS AG rose 3 basis points to 211 and Credit Suisse Group AG rose 2 to 170. To contact the reporter on this story: Abigail Moses in London Amoses5@bloomberg.net Last Updated: September 4, 2008 13:20 EDT