Markets fear banks have $1 trillion in toxic debt

[katty]

more: http://news.independent.co.uk/business/news/article3132507.ece

from The Independent & The Independent on Sunday
6 November 2007 10:17
Markets fear banks have $1 trillion in toxic debt

By Sean O’Grady, Economics Editor

Published: 06 November 2007
A new phase in the credit crunch, one of “$1 trillion losses” seems to be dawning. The crisis at Citigroup and renewed doubts about some of the world’s leading banks disquieted stock markets on both sides of the Atlantic yesterday, with the fractious mood set to continue.

The FTSE 100 fell 69.2 to 6,461.4, with Alliance & Leicester (down 4 per cent) and Barclays (off 3 per cent, to a two-year low) singled out for punishment. In New York, Citigroup, down |4.9 per cent to multi-year lows, weighed on the Dow Jones index, which fell 51.7, or 0.4 per cent, to 13,543.4. Merrill Lynch, Goldman Sachs and Lehman Brothers also dropped on speculation they face more writedowns on top of the $40bn (£19bn) announced in the past four months.

Bill Gross, the chief investment officer of Pacific Investment Management, said US mortgage delinquencies and defaults would rise in 2008. “There are $1 trillion worth of sub-primes, Alt-As and basically garbage loans,” he said, adding that he expects some $250bn in defaults. “We’ve only begun to see the pain from rising mortgage payments,” he added. Brian Gendreau, an investment strategist at ING, commented: “Financials are 20 per cent of the S&P 500 and if that sector doesn’t do well all bets are off. People just don’t know what’s on the balance sheets.”

[flashl]

1. The markets are worried about banks?

ISDA Mid-Year 2007 Market Survey: Credit Derivatives at $45.46 Trillion

NEW YORK, Wednesday, September 26, 2007– At its 2007 Regional Member Conference in New York today, the International Swaps and Derivatives Association (ISDA) announced the results of its Mid-Year 2007 Market Survey of privately negotiated derivatives.

According to the Survey, notional amount outstanding of credit derivatives grew by 32% in the first six months of the year to $45.46 trillion from $34.42 trillion. The annual growth rate for credit derivatives is 75% from $26.0 trillion at mid-year 2006. For the purposes of the Survey, credit derivatives comprise credit default swaps referencing single names, indexes, baskets, and portfolios.

Notional amount outstanding of interest rate derivatives, which include interest rate swaps and options and cross-currency swaps, grew by 21 percent to $347.09 trillion from $285.73 trillion. This compares with 14 percent growth during the second half of 2006. The annual growth rate for interest rate derivatives to mid-2007 is 38 percent from $250.83 trillion in mid-2006.

Notional amount outstanding of equity derivatives, which consist of equity swaps, options, and forwards, grew by 39 percent from $7.18 trillion to $10.01 trillion. This compares with 13 percent growth during the second half of 2006. The annual growth rate for equity derivatives to mid-2007 is 57 percent from $6.38 trillion at mid-year 2006.

“Privately negotiated derivatives activity remained robust during the first half of 2007, with credit and equity derivatives representing particularly strong growth,” said Robert Pickel, Executive Director and Chief Executive Officer, ISDA. “We expect this strong volume to continue over the 2007 second half, as privately negotiated derivatives have provided liquidity and functioned efficiently through the recent market volatility.”

The survey collects and aggregates notional amounts outstanding as of the reporting date, adjusted for double counting of inter-dealer transactions. ISDA surveys its Primary Membership twice yearly on a confidential basis. In this survey, 88 firms provided data. All major dealers responded.