From Volume 6, Issue 33 of EIR Online, Published August 14, 2007

World Economic News

Big European Banks Pulled Down by HomeBanc Default

Aug. 10 (EIRNS)—The Chapter 11 bankruptcy filing by HomeBanc Corp. in Delaware Aug. 9, for default on its $4.9-billion debt, affects several of Europe's biggest banks, the German Finanznachrichten newswire reported today. The banks, all creditors to HomeBanc, are Germany's Deutsche Bank Structured Products and Commerzbank AG New York; Fortis Capital Group (Belgium), and BNP Paribas (France). On the U.S. side, JP Morgan Chase Bank is said to suffer from the default.

Hedge Funds Admit They're Finished

Aug. 10 (EIRNS)—The ongoing turmoil in the markets, a reflection of the disintegration of the global financial system, is leading to significant losses in those "quantitative" hedge funds that use "market-neutral" strategies, via computer trading, according to today's Wall Street Journal and Citigroup. Some of these funds were asked by banks to put up more collateral to back loans, so they sold some of their holdings to raise cash, and closed out "short" trades that bet against companies.

"Nothing seems to be working," wrote a London-based Citigroup analyst. "Previously uncorrelated factors have recently been falling with the same pace, leaving investors with very few places to hide."

Aside from Goldman Sachs' two hedge funds in severe trouble, these include:

* The Renaissance International Equities Fund, one of the world's largest, a $26 billion-plus hedge fund run by billionaire James Simons, who said the firm has "not had good luck during these last few days," down 8.7% so far in August. "We have been caught in what appears to be a large wave of de-leveraging on the part of quantitative long-short hedge funds," Simons wrote in a note to investors yesterday. It lost from 4-4.5% in July.

* AQR Capital Management, a $38 billion fund based in Greenwich, Conn., which suffered losses in recent days on market-neural investments.

* Tykhe Capital, a small New York-based hedge-fund firm that manages about $1.8 billion, which reportedly lost about 20% in its largest hedge fund so far this month, and is moving to trim positions.

* Germany's largest mutual fund, Deutsche Bank's DWS, said its ABS Fund lost 30% of its value since July, as customers have withdrawn their money.

European Central Bank Pumps Liquidity Into Markets

Aug. 10 (EIRNS)—For the second day in a row, the European Central Bank (ECB) pumped liquidity into the financial system, to try to stop the ongoing meltdown. Today, the ECB injected 61.05 billion euros, in the form of a three-day tender, which was intended to bridge the situation until Monday, when markets reopen.

The German daily Handelsblatt reported on its online edition, that the intervention was requested by 62 banks, which means that again today, the interbanking market was as good as dried out. Since the almost 95 billion euros that the ECB pumped into the system yesterday was in the form of an overnight loan, to be given back today, the new ECB action today means that 34 billion euros have already been lost.

Australian, Asian Central Banks Intervene with Liquidity

Aug. 10 (EIRNS)—The Bank of Japan dumped 1 trillion yen ($8.5 billion) into its financial system. The Bank of Australia has, similarly, lent A$4.95 billion (US$4.2 billion), the most since 2003. Meanwhile central banks in the Philippines, Indonesia, and South Korea said they are ready to provide more cash if required. Banking sources report that the latter banks have already injected credit.

The three-month Japanese inter-bank rate climbed one basis point to 0.792%, the highest since September 1998. The Australian bank bill swap rate jumped to 0.6725%, the highest since Oct. 24, 1996.

According to Bloomberg, Japan's nine biggest banks have $8.5 billion exposure to subprime mortgage backed securities, which is in reality much higher.

Moe Ibrahim, a fund manager with The Asia Debt Fund in Singapore, which manages about $365 million, said: "There's a variety of scenarios you can envision, all the way ... to something which has much broader implications that causes the world to collapse like a deck of cards."

So. Korea Restricts Domestic Borrowing To Stop Carry Trade

Aug. 6 (EIRNS)—The South Korean government has implemented partial currency controls to prevent foreign currency borrowing by domestic firms aimed at speculating against the won through the yen carry trade. With the Japanese government clearly moving to restrict the carry trade, the South Koreans are effectively preventing speculators in Korea from feeding the monster which Japan is finally moving to kill. The Korean won has been driven up against the yen over the past two years, by carry trade speculators, borrowing yen at 0.5% and buying South Korean bonds at 4.25%.

South Korea's Finance and Economy Minister Kwon Okyu, speaking in Australia Aug. 3, said the yen carry trade was "a potential threat to the international financial markets."

Under the new law, beginning Aug. 10, those who have purchased foreign currencies in Korea will not be able to roll over their loans, except for loans financing overseas investments.

Unexplained Stock Sell-Off Reaches $9-15 Billion

Aug. 10 (EIRNS)—The "unprecedented event," involving a massive sell-off of stock around the world by a single unknown entity, continued today, reaching $9-15 billion, according to a knowledgeable source in the City of London. The "market neutral" funds, which are being hit hard by this sell-off, believed at first that it was a large hedge fund dumping its holdings before bailing out of the chaos in the global credit markets, but the sell-off has now become too large, "too big even to be Goldman Sachs," according to the source.

Lyndon LaRouche concurred, adding that it would be wise to look at operators like Australia's Rupert Murdoch, rather than normal speculators—that you must take into account such things as the Murdoch take-over of the Wall Street Journal. Look at the Australian and New Zealand financial chaos wrought by the unwinding of the yen carry trade, LaRouche advised.

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