Expert View: You don't have to be plagued by bad debts to catch this virus

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The Independent Online

The elite of the German business community have one regular date in their calendars for August. The opening of the Salzburg Festspiele sees them come together to clinch deals, swap strategies and occasionally even listen to music. The jewels were bigger than ever this year, the tuxedos finely cut, but the faces accompanying them were a little dyspeptic. Last week a bank in Dusseldorf came perilously close to financial collapse. A cautionary tale for us all.

One banker I did not see in Salzburg this year was Stefan Ortseifen, the (now ex-) chief executive of IKB. Way back on 20 July, his company announced "a successful start to the financial year". Pressed for a detail on any potential exposure to the US sub-prime meltdown, IKB stated it was in "no respect affected" by the CDO (collaterised debt obligation) concerns discussed in my last column.

Er, wrong. Last Sunday, Peer Steinbrueck, Germany's Finance Minister, called an emergency meeting of the nation's leading bankers to rescue IKB. Jochen Sanio, the chief regulator, was so concerned at the state of what he had found at IKB, he made reference to the bank collapse in 1931 that triggered Germany's great depression.

Of course, behind this latest crisis was sub-prime and the complex structures investing in it. After the emergency meeting, the great and the good duly chipped into a rescue fund. It is worth taking a moment to consider the scale of the obligations they have to guarantee – some $11bn (£5.4bn), or more than five times IKB's stock market value.

IKB is a small bank. The size and unexpected nature of its losses has sent a shiver down the neck of every banker, and rightly so. But we did have some positive news last week from two of Europe's biggest banks, BNP Paribas and Deutsche Bank, Deutsche actually saying it had benefited from the sub-prime volatility. It could also point to its many warnings on this issue over the past 12 months.

And yet the shares still fell on the day. After IKB, investors must be wondering where the next victims lie. On Wednesday, the virus spread to US housing stocks, perhaps a little belatedly. American Home Mortgage Investment Corp announced its bankers had tightened credit lines and it might be forced to liquidate some assets. Oh, you should have seen the panic. At one stage shares in Beazer Homes were down 20 per cent, Meritage Homes fell 9 per cent and WCI Communities 14 per cent.

Similarly, the virus carriers, the credit hedge funds, brought us more bad news last week. Bear Stearns was forced to announce a third fund that was halting investor redemptions. There is concern among hedgies that the end-July valuations are a near-impossible task, as many assets have estimated values with a spread of 20-40 per cent of value depending on best guesses.

The virus is now established in housebuilding stocks, credit hedge funds, and related markets. Investors can only blame themselves for any surprises going forwards in these areas. But IKB is a reminder that skeletons still lie hidden in banking closets. Consider also events last week at Macquarie bank in Australia.

Australian Mutual Fund, a mass-market fund that was not invested in US sub-prime, announced a 25 per cent loss in investor value. The fund had been invested in higher-quality senior corporate debt. The market had suddenly been gripped by "supply demand imbalance".

Beware: this crisis has a long way to play out. And I am sorry to report that the earthquake in credit may come home to you and me only too soon. Anyone whose fixed-rate mortgage is coming up for renewal had better take a look at what is happening to the loan terms on offer. Basically, banks are struggling to match revenues to demand. And with the Bank of England having been a little behind the curve in raising rates, help is unlikely to come from that quarter for a while, as the MPC waits for inflationary concerns to subside.

The next year could see a real squeeze on UK homeowners. It isn't just the German bankers who should be feeling dyspeptic.

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