Funding fears hit financial shares

Funding fears hit financial shares
By FT reporters
Copyright The Financial Times Limited 2007
Published: August 16 2007 03:00 | Last updated: August 16 2007 03:00


US markets took another late plunge yesterday as worries over the ability of financial firms to fund their activities pushed shares in the biggest US mortgage lender sharply lower.

The yield on short-term Treasury bills tumbled, the latest indication that investors are rushing for safe and liquid assets and that financial market liquidity is still in doubt in spite of central bank intervention since last week. This intensified speculation that the US Federal Reserve would be forced to cut interest rates to restore calm and boost liquidity well before its scheduled meeting next month.

European bank shares were also under pressure amid continuing fears about subprime-related losses and a lack of liquidity in the commercial paper market.

Companies that rely on regular sales of short-term debt in the form of commercial paper have experienced particular difficulties as the usual buyers have proved wary in current market conditions.

Shares in US mortgage lender Countrywide fell 13 per cent to $21.29 after the group was reported to be facing problems selling commercial paper. Its shares are down about 50 per cent this year.

The listed KKR Financial, an affiliate of Kohlberg Kravis Roberts, the US private equity group, tumbled 31 per cent to $10.52 after it said it was facing disruptions in short-term borrowing.

The S&P 500 index fell 1.4 per cent - giving it a loss of 0.8 per cent for the year - with almost all of the decline occurring in the last two hours. That is likely to put pressure on Asian and European markets today. The Dow Jones Industrial Average fell 167.45 to 12,861.47, its lowest close since April 24.

Faced by an apparently continuing liquidity drought, investors raced for the safe haven of three-month Treasury bills.

The implied yield on the bills plummeted from 4.5 per cent to 3.9 per cent yesterday, the sharpest drop since 1989.

William O'Donnell, strategist at UBS, said: "Money market funds have seen massive inflows over the last few weeks in a classic flight to quality."

He said lack of confidence in financing markets had shut down the short-term commercial paper market. "Now the buyers are only interested in Treasury bills."

The Fed lent banks $7.7bn in Treasuries yesterday, the largest amount so far.

Foreign exchange markets also saw intense activity as traders repatriated assets to the US. The yen hit its strongest level against the dollar since March, having risen 6 per cent since June. The dollar has gained 1.4 per cent this week against a trade-weighted basket of major currencies.

The problems at KKR Financial cast a further cloud over KKR's plans to raise $1.25bn in a flotation.

Shares in private equity and hedge fund group Fortress again fell below their February debut price of $18.50, losing 8.6 per cent to a low of $17.56.

By Richard Beales, Saskia Scholtes, Michael Mackenzie, James Politi, John Authers and Anuj Gangahar in New York