Investors fear another big financial firm failure

By Aline van Duyn in New York

Published: August 11 2008 23:30 | Last updated: August 11 2008 23:30

Institutional investors expect another big financial firm will collapse within the next six months in the continued fallout from the credit crunch, new research has shown.

Nearly 60 per cent of US and European institutional investors surveyed by Greenwich Associates believe there will be such a failure within the next six months. Another 15 per cent think it will happen in six-12 months.
EDITOR’S CHOICE
Fed presses Wall Street banks on liquidity - Aug-10
The Big Freeze part 2: Banking - Aug-04
Fed values Bear Stearns assets at $29bn - Jul-04
Lehman speculation blamed on short-sellers - Jul-01
Former Bear hedge fund duo charged - Jun-19
In depth: Bear Stearns - Aug-11

The investors feared that the knock-on effects of collapse of a big financial institution on the credit derivatives market would pose a “serious threat” to global markets.

“Most institutions think we are currently in the most dangerous period for global financial services firms,” said Frank Feenstra, a consultant at Greenwich Associates. “Perhaps if the markets can make it through the next six months, the level of pessimism may begin to subside.”

The survey of 146 institutions by Greenwich Associates, to be published this week, included banks, hedge funds, investment managers, mutual funds and pensions funds in the US, Canada and Europe.

Concerns about “counterparty risks”, where exposures through derivatives or other securities to a failed bank or investor can lead to a chain reaction of financial collapse, pushed the US Federal Reserve bank to push for a rescue of Bear Stearns in March.

Central banks and regulators, led by the Fed, are pushing dealers to take steps to reduce the systemic risks around credit derivatives, a sector which has ballooned to $62,000bn of outstanding contracts in just a few years.

The Greenwich survey found that 55 per cent of respondents had stopped using one or more financial institutions, other than Bear Stearns, as a counterparty on credit trades due to concerns about solvency, although it did not name them. Many had cut back their use of credit default swaps, the most common type of credit derivative.

US institutions which took part in the survey were the most concerned about counterparty risks in the credit derivatives market. Greenwich said 85 per cent regard it as a serious threat, compared with 55 per cent of European investors.

Nearly 80 per cent of institutions said banks had tightened margins or collateral requirements in the last year.

Concerns about banks’ financial strength continues to be reflected in elevated short-term funding costs that banks face.

Well, allow me to show my complete ignorance on things like this, but what if all the exchanges agreed to a 5-day moratorium on trading, (like what happened after 9/11).. take a short vacation from the meltdown? Afterall, when you're having a heart attack, you don't try and run a marathon!

Don't know how/if it would solve things, but at least it would put a pause on things...

What are your shares worth if there's no buyer for them?

That's mark to market accounting.

In a way I am kind of glad. I am tired of the money people (financial service firms) servicing nickels and dimes out of my change bucket.