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New York: The unravelling US subprime mortgage market is causing other markets to fray around the edges faster than anyone expected.
As the Federal Reserve convenes for its latest meeting on Tuesday, the corporate credit markets are grinding to a halt. About $90 billion of bonds and nearly $250 billion of loans are still awaiting buyers, several high-profile hedge funds from the US East Coast to Australia have failed, and a major US mortgage lender this week closed its doors.
"All these people saying there is no credit crunch and no economic impact - 'Are you kidding me?'" said Jeffrey Gundlach, chief investment officer at TCW Group in Los Angeles, which manages assets worth $160 billion.
"Ask Goldman if there is no credit crunch, ask Bear Stearns if there is no credit crunch, call up American Home Mortgage and ask them if there is no credit crunch. Come on! It is staring you in the face," Gundlach added.
On Friday, shares in Bear Stearns Cos dropped as much as 7.85 per cent after credit rating agency Standard & Poor's lowered its outlook on the bank's debt to negative, citing problems at Bear's managed hedge funds.
In a conference call, Bear Stearns chief financial officer Samuel Molinaro said: "It's as been as bad as I've seen it in 22 years. The fixed income market environment we've seen in the last eight weeks has been pretty extreme."
His comments on Friday helped cause the biggest one day fall in the benchmark S&P 500 stock index since February 27.
The current volatility in global financial markets resulting from rising default rates on US subprime mortgages has led to a risk reappraisal across credit and stock markets, which some say can be seen as good news for the Fed as it cools a takeover boom fuelled by excessive global liquidity.
Gripped by panic
Nonetheless, global financial markets have been "gripped by panic", said Chen Zhao, managing editor of Global Investment Strategy at Bank Credit Analyst in Montreal.
"Further intensification of financial stress will likely push the Fed to take action," he added.
Hit particularly hard by the drying up of liquidity and rising risk aversion are investment banks and brokerage firms which have been left to underwrite takeover deals already announced.
Two Bear Stearns hedge funds collapsed last month and last week the investment bank blocked investors from withdrawing money out of a third fund, as losses in the credit markets expand beyond securities related to subprime mortgages.
But Bear Stearns had some company last week.
Macquarie Bank Ltd, Australia's largest securities firm, said investors in two hedge funds may lose up to 25 per cent of their money, blaming fall-out from the US subprime mortgage crisis.
Boston-based hedge fund manager Sowood Capital Management LP said this week that it lost more than $1.5 billion in July after declines in the corporate debt markets and will close its two funds.
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