Financial Meltdown Goes Global
Aug. 1, 2007 (EIRNS)—The meltdown of the world financial system, which economist Lyndon LaRouche has described as "already collapsed," has spread to Germany, France, and Australia. Meanwhile, the Swiss financial giant Credit Suisse has warned hedge funds that credit availability is in danger of evaporating "as fast as water off the desert tarmac."
Behind the collapse is the drying up of the source of cheap credit, the Yen carry trade, which has funded the inflation of hot air in global markets. The expansion in so-called "market value" in recent years has been based not on productive investment but on paper transactions such as corporate buyouts, which produce no net economic profit, but require increasing flows of money to pay investors in these pyramid schemes.
Now the ability to pay has run out, as a just-released paper by Credit Suisse analysts makes public. The paper warns that banks are carrying a large exposure to new bond issues, and if they cannot sell them, then credit lines to hedge funds and other counterparties must be cut—a move which could "precipitate a cascade of position liquidation," otherwise known as a crash.
Among the consequences already being felt:
- Last night, the German bank created to fund the Marshall Plan recovery of the 1950s, announced it had provided an emergency fund of $11 billion to save the major funder of German industry and small business, the IKB or German Industry Bank. The Kreditanstalt fur Wiederaufbau was forced to provide the money, because the larger private institutions were reportedly tapped out. Deutsche Bank, Germany's largest, is facing billions in losses from the collapse of the U.S. sub-prime mortgage market. The bail-out goes into an emergency account to protect the German Industry Bank against exposure to a $17.4 billion bad investment in Delaware-based Rhineland Funding.
- The announcement of the insolvency of American Home Mortgage Corp. late yesterday sent European stock markets reeling this morning. The Paris stock exchange opened down 2.65% today and remained down 2.53% at noon European time. Stock in the U.S. mortgage lender, which topped $36 in December 2006, fell to $1.04 before the New York Stock Exchange halted trading. What sent investors worldwide into panic was the report that the company's losses were not limited to the sub-prime market of bad-risk borrowers, but affected all groups of mortgage holders. The Long Island, N.Y. company is the twelfth largest U.S. mortgage lender with 7,600 employees.
- Losses in the British markets this morning were led by the Man group, the world's largest hedge fund, which lost 5% of value. Shares in Royal Bank of Scotland, the world's fifth largest financial group, were down 2.7% at market closing, according to Bloomberg. A report on hedge funds in today's Financial Times of London is acompanied by a graphic of vultures circling the collapsing hedge funds. Among the listed losers are Bear Starans Asset Management, Dillon Read, United Capaital Asset Managment, and Paulson & Co. of the U.S.
- Macquarie Bank, Australia's largest securities firm, announced that two of its hedge funds could lose up to 25% of $300 million, because of the collapse of the U.S. sub-prime market. As a result the bank's share price collapsed by 10.7% in one day. Its Macquarie Fortress Notes fund and the unlisted Macquarie Fortress Fund are heavily exposed to the U.S. market. The two funds are leveraged by a factor of about 6.5. Six Australian hedge funds have bit the dust in recent weeks. Australia's hedge fund market, worth $45 billion, is one of Asia's largest.