Panic in market on fear of insolvency at Bear Stearns, Fannie Mae

By Ambrose Evans-Pritchard
The Telegraph, London
Tuesday, March 11, 2008

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/11/cnbear...

Panic swept the credit markets on reports of an insolvency crunch at both the US investment bank Bear Stearns and the mortgage giant Fannie Mae, triggering a dramatic surge in default insurance and rumours of yet another emergency rate cut by the US Federal Reserve.

Financial shares plummeted on Wall Street in another day of wild trading as the markets began to fear that the $200 billion (L100 billion) lifeline pledged by the Federal Reserve last Friday would not be enough to halt a vicious downward spiral.

The Dow Jones index was off 137 points to 11,757 in New York, breaking through the crucial support line of its January lows. Credit default swaps (CDS) measuring bankruptcy risk on Bear Stearns debt rocketed from 246 points to 792 on fears that it had been unable to raise capital to cover mortgage losses and was preparing to invoke Chapter 11 bankruptcy protection.

The company denied the reports, insisting that it had $8 billion of ready credit lines and enough funds to meet its debt obligations for the next year without having to sell assets or take out fresh debt. "There is no truth to the liquidity rumours," said a spokesman.

The share price was down 10 percent in early trading.

Lehman Brothers, the biggest mortgage underwriter, was also mauled on leaked reports that it planned to slash its worldwide workforce by 5 percent. Lehman CDS contracts leaped 60 points to 395.

Almost every indicator of credit stress was flashing warning signals. The CDX index measuring default risk on US investment grade bonds rose to 190 and the iTraxxx Europe touched 150.

Bank of America said the Fed would have to cut rates to 1.5 percent by the middle of the year. The futures markets have begun to price in the serious possibility of a 100-basis-point drop next week. Goldman Sachs said the Fed chairman, Ben Bernanke, might push through an emergency cut even sooner.

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