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June 15, 2008
The credit crunch was supposed to all over and things were getting back to normal. So how come Babcock and Brown, Australia's second-biggest investment bank and one time darling of the market boom, has fallen from grace so fast? A few weeks ago the bank was worth about $15 a share - this weekend it's worth a third of that at $5.25 after falling more than 50% in recent days. The stock was worth $34.60 a year ago.
Hedge fund attack say the economic commentators in the Australian Financial Review. The debt -driven business model, deals based on big debt and rising asset prices, is out of favour, the hedge funds are targeting leveraged corporations, and Babcock and Brown are now under pressure to sell their assets.
As Robert Gottliebsen says in his 'Babcock's Deal Addiction' in Business Spectator, the hedge funds knew the market capitalisation (or share price) trigger point ($7.50) and they start short selling the stock.
The process creates panic and down the stock goes and it does not stop until the lending clause has been triggered. Undoubtedly, a gradual liquidation of assets will probably now take place by Babcock and Brown to repay banks as their loans fall due. It will be very difficult to keep this process orderly while at the same time dealing with the hedge funds
Can we trace this situation back to the easy money and low interest rates in the 1980s and 1990s in the US, when laissez-faire mentality amongst the monetary authorities ruled? How did the monetary auhorrities ---central banks, financial regulators and governments-- allow speculative fever in housing and financial markets to become so intense--the credit bubble-- that it turned into a bust. If we remember, debt had been growing faster than incomes in most corners of the English-speaking world.
Our economic high priests (economists) claimed there was nothing to fear. Sure, there was more debt around, but the architecture of the financial system was more robust and could bear more strain. Then last summer, the great edifice of credit started to collapse. In this review of Charles Morris's The Trillion Dollar Meltdown in the Sunday Times Edward Chancellor says that the fact that the subprime mortgages had little prospect of being repaid bothered no one:
Everyone in the credit system (the home appraisers, mortgage brokers, lending banks, Wall Street firms that acquired bundles of mortgages and sold them on, ratings agencies that stamped these securities with their investment-grade imprimatur, as well as the hedge funds that snapped up the riskiest slices of debt) was primarily concerned with fees. This encouraged reckless and predatory lending. Morris points out that the new credit system actually favoured riskier loans because they meant higher rates and produced more “spread” for market participants to play with.
The $1 trillion refers to the amount of defaults and writedowns Americans will likely witness before they emerge at the far side of the bursting credit bubble, Bubbles lead to busts. Busts lead to panics. And panics can lead to long, deep economic downturns,
The current crisis--and its impact on Bacock and Brown-- discloses the limits of the free-market ideology that has held sway since the early 1980s.The growth model - as applied by Macquarie and B&B---worked in a bull market. Now asset prices are falling. The banks have stopped lending. So there are precious few buyers for any major assets at all. This is a bear market. B&B is a group that has relied on doing huge one-off deals for income.
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I believe that this is a massive effort to short the stock that should be investigaged by the SEC, all transactions leading up to this event should be reviewed, you have major merchant banks like UBS giving out buy orders for BNB just weeks before this event happened. All the merchant banks shorting this stock were probably aware many of their clients bought this stock on margin and that a push to bring it down would trigger automatic sell orders for them to buy it up. This is immoral if not illegal.This is my view anyway.