a rugged week ahead perhaps

Sorry if this from The Australian has already been posted.

Black hole week begins on Wall St

David Nason, New York correspondent

September 17, 2007

INVESTORS around the world will be anxiously watching Wall Street this week, with investment banks stung by the sub-prime crisis likely to report a $US30 billion ($35.6 billion) black hole against the backdrop of a critical US Federal Reserve meeting.

The Fed is expected to bow to pressure and lower benchmark US interest rates by at least 25 basis points this week, but this expected intervention won't be the only thing claiming the attention of investors.

In the first real insight into the impact of the debt crisis, analysts predict investment banks may have to write down as much as 10 per cent of the $US300 billion of leveraged loans when they report third-quarter results to the market.

Just how well the banks are coping with the credit squeeze will become clearer when Lehman Brothers, Morgan Stanley, Bear Stearns and Goldman Sachs report earnings. The leading investment banks have been hit hard by the sub-prime crisis - on the stock market this year Goldman and Morgan are down about 20 per cent. Lehman, which has announced about 2500 job cuts, has dived 25 per cent and Bear Stearns is down 30 per cent.

Also causing concern as the Fed's policy setting committee chews over a rate cut at its meeting late tomorrow is the task of the investment banks to underwrite the $US26billion buyout of US credit card processing group First Data Corp.

Private equity giant Kohlberg Kravis Roberts will also begin the task of selling the first tranche of debt linked to the deal.

The $US5 billion offering represents the first roll of a $US320 billion leveraged buyout dice. The debt, held by worried banks, has been frozen by the credit crunch that arose from rapidly rising sub-prime mortgage foreclosures and the worst housing slump in the US in 80 years.

The FDC deal has been called the canary in the LBO coal mine, the first real test of investor appetite for buyout debt since the sub-prime crisis exploded. The seven banks involved in the deal will meet investors at New York's Pierre Hotel later today to begin the hard sell.

Of most interest to the market is how quickly buyers will come forward and what losses the banks are prepared to suffer in order to get LBO debt off their books.

Whatever the banks can't sell, they will have to keep.

If take-up is slow, the banks may be panicked into selling at fire-sale prices to vulture investors who have parked their cash in Treasury notes while waiting for opportunities to arise. "There's plenty of money in Treasury bills waiting for these LBOs to come out," one merchant banker said yesterday. "It has made it difficult to do other deals because investors are waiting for the cheap stuff to appear."

The declines have come on the back of the stalled LBO deals, the sub-prime meltdown and the severe credit squeeze, all of which can hardly escape the attention of a Fed that has now turned its gaze to the financial markets, in particular the reluctance of banks and other lenders to provide funds to anyone with a significant exposure to risky home mortgage debt.

It's a classic catch-22 situation.

The tighter credit conditions are compounding and prolonging the US housing downturn, which is making it harder for people to refinance their mortgages in order to avoid foreclosure. One report last week suggested that as many as one-third of all mortgages originated in August lapsed due to lack of funds. But in assessing the need for a rate cut, Fed chairman Bernanke is likely to be influenced by the August job numbers, which slumped 4000, the first decline in four years, and by last month's worrying numbers on retail sales.

According to Commerce Department data released on Friday, retail sales rose 0.3 per cent in August but fell 0.1 per cent when allowance was made for motor vehicle sale increases driven by promotions and a surge in petrol sales due to falling pump prices.

The majority of analysts now expect a rate cut between 0.25 per cent and 0.5 per cent but just as important to the health of the market will be the guidance Bernanke provides about a timetable for the additional rate cuts that Wall Street expects.

Once the Fed's rate cut meeting is over, Bernanke is off to Congress, this time to testify before the House Financial Services Committee on the Bush administration's so far modest initiatives to help home owners avoid defaulting on mortgages.

Bernanke has yet to be heard on this issue. It will be interesting to see what degree of compassion he has for the thousands of Americans now losing their homes.

at http://www.theaustralian.news.com.au/story/0,25197,22428535-643,00.html

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