The 2007 stock market

The Chinese are subsidizing the American way of life. Are we playing them for suckers—or are they playing us?

by James Fallows

The $1.4 Trillion Question

S tephen Schwarzman may think he has image problems in America. He is the co-founder and CEO of the Blackstone Group, and he threw himself a $3 million party for his 60th birthday last spring, shortly before making many hundreds of millions of dollars in his company’s IPO and finding clever ways to avoid paying taxes. That’s nothing compared with the way he looks in China. Here, he and his company are surprisingly well known, thanks to blogs, newspapers, and talk-show references. In America, Schwarzman’s perceived offense is greed—a sin we readily forgive and forget. In China, the suspicion is that he has somehow hoodwinked ordinary Chinese people out of their hard-earned cash.

Banks 'may need an extra $143bn'


Banks may need to raise as much as $143bn (£77bn) to weather the credit crisis, Barclays Capital reports.
They say the banks will need extra money if bond insurers, who insure the products at the centre of the sub-prime crisis, lose their top credit ratings.

If their credit ratings are cut, it could make it harder for it them to pay out, leading to banks reporting bigger losses on sub-prime debt.

Fears about bond insurers helped spark off this week's stock market falls.

The world's largest banks have already admitted losing more than $100bn from mortgage bonds gone bad.

$820bn at risk

Analysts at Barclays Capital said banks own $820bn of securities guaranteed by bond insurers.

"This is a huge amount, but the assumptions used are also very aggressive, designed only to show how, taken to its extreme..., bank capital could be influenced," the Barclays Capital report said.

Bond insurers, such as Ambac Financial Group and MBIA, have suffered billions of dollars of write-downs in recent months and are expected to sustain more, after insuring debt hit by the sub-prime mortgage crisis.

Investor fears

Many investors fear the insurers have too little capital given their obligations, and worry that a cut in their credit rating would make it more expensive for them to borrow money.

Ratings agency Fitch cut Ambac's rating last week, while rival agencies Moody's and Standard & Poor's are reviewing Ambac's and MBIA's ratings.

However, there is some optimism for the sector after reports that billionaire Wilbur Ross was in talks to acquire Ambac.

The reports follow comments this week from New York State regulators saying they would consider lending support to the struggling bond insurance industry.

Sub-prime exposure

Firms like Ambac are know as 'monoline' insurers and are at the centre of the sub-prime crisis.

The sub-prime market is focused on providing home loans to those with limited or poor credit histories.

Many of these mortgages were converted into financial instruments and sold on to investors including banks.

But a series of interest rate rises over the past two years has meant many sub-prime borrowers could no longer afford their monthly payments, causing them to default.

This led to a steep fall in the value of investments linked to sub-prime loans and has caused many banks to report massive losses.



Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7209839.stm

Published: 2008/01/25 18:30:53 GMT

When we cough, everybody catches a cold.