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CNNMoney.com – On a gloomy morning in early August, more than a month before Wall Street and the world’s financial system seized up, a senior aide to Iceland’s Prime Minister paid a visit to the Russian embassy in Reykjavík to make a controversial request: Bail us out.
Iceland had one of the richest economies in Europe, but it had a problem. Its three main private sector banks had become so large that their assets amounted to more than ten times the gross domestic product of the country – and there were signs that they might run into trouble.
Iceland had asked its traditional allies for help, but to its consternation, its pleas to the U.S. Federal Reserve, the Bank of England, and the European Central Bank went unheeded. Instead, the answer was always, "Ask the International Monetary Fund" – a drastic step Iceland didn’t want to take.
Bloomberg – Bank of England Deputy Governor John Gieve said investors are still facing “acute” stress as market declines force hedge funds to sell assets.
“The financial system remains under acute strain,” Gieve said in a speech in London today. “The falls in equity markets, corporate bond prices and the prices for leveraged loans is hitting both long-term institutional investors and leveraged investors, including hedge funds.”
The Bank of England said in a semi-annual report that $2.8 trillion in banking losses and the threat of a global recession are increasing risks to financial stability. Meanwhile, Prime Minister Gordon Brown yesterday suggested he may scrap decade- old fiscal rules to prop up the banking system as the nation faces its first recession since 1991.
Investment losses at hedge funds and insurers pose further risks to the system, the central bank’s report said, as insurers may fall short of capital requirements and face credit rating downgrades, while hedge funds may be forced to sell assets.
Bloomberg – Hedge funds met with the U.K.’s Financial Services Authority and the Bank of England in London to discuss the return of their assets from Lehman Brothers Holdings Inc., the Financial Times reported, citing unidentified funds.
Representatives from the Managed Funds Association, which speaks for some of the biggest U.S. hedge funds, met with Lehman’s administrators and the two financial watchdogs on Oct. 22 to speed up the process, the newspaper said.
The funds emphasized the need for more communication from the bank’s U.K. administrators, led by Tony Lomas of PricewaterhouseCoopers LLP, according to the FT.
The administrators said the only creditor meeting will be held on Nov. 14 at London’s O2 complex, the FT said.
Reuters – A U.S.-based trade group for hedge funds has urged the Bank of England to step in and speed up the freeing up of assets frozen in the collapse of Lehman Brothers Holdings Inc, saying it has become "an issue of very substantial systemic significance."
Richard Baker, a former U.S. congressman who heads the Managed Funds Association (MFA), said the lock-up of Lehman assets threatens British prime brokerage businesses and "will exacerbate systemic risks if not handled properly."
He made the plea in a letter dated Oct. 13, sent to the British central bank’s governor on the eve of a meeting between the administrators of Lehman Brothers International (Europe) (LBIE) and UK regulators.
Baker also said the current process is adding more uncertainty to global markets and that expediting the return of assets will give the market "a much needed boost of liquidity and confidence."
Washington Post – Central banks in the United States, Europe and Japan will consider taking foreign-denominated assets as collateral in an effort to provide liquidity for battered financial markets, the Nikkei newspaper said on Sunday.
Currently most central banks only accept assets denominated in their home currency as collateral, the paper said. If central banks were to accept assets denominated in other currencies, cash-strapped firms would be able to get funds easier, it said.
Six central banks, including the U.S. Federal Reserve, the Bank of Japan, the European Central Bank, and the Bank of England are discussing a potential rule change, the Nikkei said.
The paper did not quote any sources and no one was immediately available at the Bank of Japan for comment, however BOJ Governor Masaaki Shirakawa said earlier this week the move was under consideration.
Reuters- Antonio Borges, a former senior banker at Goldman Sachs, has been appointed chairman of the Hedge Fund Standards Board (HFSB), the custodian of the voluntary standards scheme devised by leading members of the sector.
Borges, vice chairman of Goldman Sachs International until February and a former dean of the European business school Insead and vice governor of Banco de Portugal, will assume the role on July 1.
The HFSB will oversee the code of practice devised by the Hedge Fund Working Group, which comprised 14 leading hedge fund executives mainly based in London and was led by Andrew Large, a former deputy governor of the Bank of England.
Telegraph.co.uk- Hedge funds have suffered major losses after wrongly betting that market inflation expectations would fall, the Bank of England has said.
The Bank reported that many hedge funds had been badly burnt after market expectations for inflation rose to a new high, most recently hitting 4pc for the first time since 1997.
So significant were the funds’ bets that they actually distorted the so-called “breakevens” rate – which represents the average level of inflation investors expect over a certain period – pushing it up sharply in the months up to May.
