US banks refuse to accept subprime collateral

US banks refuse to accept subprime collateral
By Deborah Brewster in New York
Copyright The Financial Times Limited 2007
Published: August 15 2007 03:00 | Last updated: August 15 2007 03:00


US banks caught in the credit market upheaval have started refusing to lend money against hedge funds' subprime credit portfolios.

Hedge funds said several banks in recent days had cut off lending to funds that use credit portfolios, including mortgages, collateralised debt obligations and subprime securities, as collateral. That leaves the highly leveraged funds heavily reliant on their prime brokers for borrowing.

The banks mentioned were Bank of America and Countrywide, although there were believed to be others. Bank of America declined to comment. Countrywide did not return calls.

Hedge fund managers nervous about the reliability of theirlending sources were likely to attempt to reduce their level of borrowings further, said one hedge fund manager not directly affected by the banks' actions.

Several hedge fund managers, who spoke to the Financial Times on condition of anonymity, said funds that were heavy investors in the credit markets and, therefore, often highlyleveraged, were finding they were no longer able to use theirportfolios as collateral to borrow.

One manager said: "My prime broker is my first source of borrowing but I used to get additional financing from other sources. I called my usual banks last week to ask for their terms and they told me there weren't any terms because they weren't lending against my credit portfolio any more. I'm not that happy. I need more than just one lender."

There is no evidence that prime brokers have reduced such lending to their own clients. Yet, prime brokers have recently lifted their requirements for margin lending, contributing to forced selling as funds have to meet margin calls.

Steve Persky, a managing partner at Dalton Investments, said: "The type of investors who are exposed are highly leveraged with CDOs and asset-backed securities. It's a game of musical chairs . . . people have too much debt and are trying to offload it."

"If the prime brokers began to pull back, that would have a huge effect on the hedge fund business," said one hedge fund manager.