Plunge into the financial markets, they say, and you never know who’s swimming naked — at least, not until the tide goes out.
When the credit tide went out in July and August, it revealed more than a few knickers in the sand.
Bear Stearns topped the list on the U.S. side of the Atlantic, and industrial bank IKB topped the list on the other. In a letter to investors sent out in July, Bear Stearns said that as of June 30, 2007 “there is effectively no value left for the investors of the [High Grade Structures Credit Strategies Enhanced Leverage Fund] and very little value left in the High Grade Fund.”
The letter highlights a key problem in the subprime mess in that it talks about the difficulty they had in calculating the performance. The meltdown of the two funds led to the resignation of Bear Stearns President Warren J. Spector.
Until recently, IKB was a lender of first resort for Germany’s Mittelstand — the thousands of privately-owned small and middle-sized companies that form the backbone of Germany’s economy. Now it’s just another of those trusty old Deutschland AG workhorses to find itself rendered into glue in the factory of modern finance, having lost an undisclosed amount in the U.S. subprime mortgage implosion.
The fact no one outside a select few know how much was lost is indicative of the problems confronting both the private equity and credit derivatives industries.
More alarming than the losses suffered by those who marched willingly into the valley of subprime debt are the losses suffered by those who thought they were only enjoying the view. BNP Paribas, for example, suspended three of its funds in August — not because the funds had taken losses, but because there weren’t enough buyers and sellers in the market to offer indicative prices. Goldman Sachs spent $2 billion to bail out its GEO fund. That surely sent a shiver down the spine of members of the Clever Gents Holding Illiquid Assets, a club that has seen its membership bloat uncomfortably. Central banks responded with massive infusions into the money markets — the European Central Bank (ECB) alone pumping in more than €200 billion on Aug. 9 and 10. At press time, however, it was still difficult to see who owes what to whom.
Debt holders, fearful of losing their easy access to cash, are tripping over each other to come clean on the risks they’ve exposed themselves to, while regulators, mindful of the persuasive power of trust rewarded, want to prove to innocent debt holders that laying their credit-default-swaddled heads serenely in the mouths of competent regulators won’t lead to said heads being bitten in two.
