European regulators and bank executives scrambled to inject capital yesterday into a banking system that nearly seized up with losses from subprime and other asset-backed bonds.
One of the most remarkable days in recent capital-markets memory was kicked off when France’s largest bank, BNP Paribas, announced that three of its money-market funds halted withdrawals after sustaining greater than 20 percent losses.
It ended with the European Central Bank’s emergency injection of $130 billion of cash into European bond markets to ensure orderly trading. The move was nearly two times more than the bank injected in the days after the Sept. 11, 2001, attacks.
BNP’s funds were heavily invested in very low-rated asset-backed securities and collateralized debt obligations – bonds made from other bonds – whose markets have collapsed in both liquidity and value over the past month.
About $2.2 billion in assets were affected.
New York money manager Fischer Francis Trees & Watts managed the funds for the bank.
The unprecedented collapse of money-market funds, which are used by investors as a cash or savings-account substitute, comes only a week after BNP’s CEO proclaimed that the bank’s exposure to subprime was “absolutely negligible.”
The trouble didn’t stop in France. Dutch bank NIBC Holding announced a loss of $187.2 million due to subprime bond exposure and a German newspaper reported that WestLB was similarly compromised. But the bank said its exposure was minimal, placing it at around $240 million.
While the losses are both painful and embarrassing for the banks, the near-meltdown yesterday underscores a much broader problem that has received little attention from either investors or regulators: Many banks have exposure to asset-backed securities that sometimes exceed their market capital.
Banks in Europe and the U.S. have massive exposure via off-balance sheet business practices. For example, most big commercial and investment banks issue tens of billions of dollars annually in commercial paper backed by low-rated asset-backed securities.
