Bank fears threat from credit standards

Anyone catch what Larry Fink said about leverage, hmmmm. Trying to stop a bubble thats probably already formed.





Bank fears threat from credit standards

By Chris Giles and Gillian Tett in London and Richard Beales and Chrystia Freeland in New York

Published: April 25 2007 22:24 | Last updated: April 25 2007 22:24

A surge in cheap corporate lending with looser credit standards “has increased the vulnerability of the [global financial] system”, the Bank of England will warn on Thursday in its strongest comments to date on financial stability.

The Bank also cautions against weakening standards of risk assessment when bank loans are repackaged and resold to new investors, such as pension and hedge funds. In its twice-yearly financial stability review, it says the recent turmoil in the US subprime mortgage market illustrates a problem that original lenders, which sold off the default risk, often allowed their standards to slip.

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“Similar problems in a more significant market, such as corporate credit, could have more serious consequences if credit quality were to deteriorate,” the Bank says, but it insists the UK financial system remains highly resilient, underpinned by a benign global economic outlook.

Its concerns relate to the consequences of an unforeseen shock to the global economy, world politics or a large financial institution. It is worried that other big financial institutions could find themselves over-exposed in the event of serious turbulence on global markets.

The Bank’s concerns accord with those of Larry Fink, the chief executive of BlackRock, the $1,000bn-plus fund management group, in a Financial Times interview on Wednesday. He said lending to highly indebted companies was becoming lax in ways similar to those that have undermined the US subprime mortgage market, making the leveraged loan market “tomorrow’s problem”.

“If I was the chairman of the Federal Reserve I’d be paying more attention to that because, to me, this is going to be tomorrow’s problem,” Mr Fink said. “Standards have deteriorated to levels that we never even dreamt we would see.”

The biggest reason for weakening lending standards were plentiful liquidity and consequent strong investor demand, Mr Fink said. But he warned many investors were moving into illiquid “alternative” investments such as hedge funds and private equity.

Aggressive lending is also supporting the private equity industry and Mr Fink said that any credit slump would have a knock-on effect on private equity groups such as Blackstone, which is planning a public offering. He said Blackstone, where he once worked, was highly diversified and “uniquely qualified” to go public.

 

Another scare tactic, so the rich can make all the money, and keep the scared little guy sidelined. We will need his money at the greedy dumb top.