When Standard & Poor's an-nounced that write-downs related to subprime losses might be nearing an end, it should have caused at least a brief rally in the market simply because good news has been so rare over the past months.
However, it happened in the shadow of Bear Stearns' fall from grace.
Analysts at UniCredit Markets and Investment Banking said S&P's loss estimates for subprime-linked structured finance do not include potential write-downs from Alt A-loans, from securities backed by home equity loans or from nonsecuritized subprime loans that are still on the balance sheet of lenders.
Nor do the losses take into account leveraged loans, CMBS, consumer loans or credit cards.
So here we are today bracing for the Bear backlash in a market that is more uncertain than ever.
It is a market where even repeated liquidity interventions by the Federal Reserve have failed to make a dent in market sentiment. Nor has the Bank of England's injection of GBP5 billion ($10.01 billion) into the short-term money markets put an end to the crisis, which is still gathering momentum.
In the U.K., the surprise distribution of reserves appeared to do little to normalize sterling overnight rates and keep them in line with bank rates.
Market sources instead reported that the spread between the two widened after the announcement of the extra funds.
Furthermore, the collapse of Bear Stearns highlights just how exposed leveraged investors are to the systemic risks caused by margin calls.
Recall that it was the collapse of Carlyle Capital Corp.'s (CCC) RMBS fund that sent Bear Stearns shares down 17%, when investors became concerned about Bear's exposure to CCC earlier this month. Even then, the bank reassured the market that its balance sheet was not weakened.
The question now on everyone's minds is who else is invested in these impacted funds and whether these buyers will fall as hard as Bear Stearns.
If they do, will the Fed - or for that matter the central banks - be able to sustain this orchestrated bailout effort?
In the current environment, these systemic threats have become a force to contend with for players that are highly leveraged.
As UniCredit analysts point out, only those with sufficient cash will be able to survive more value declines or even take advantage of what has become a lasting downturn.
"Flexibility is very limited - in 24 hours we have not heard about any hedge funds that were forced to liquidate due to margin calls by their creditors," the UniCredit analysts said.
"But this is no relief: We believe the risk of a further collapse adding further
pressure to the whole credit market remains high!"
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