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  Balance Sheet Time Bombs: In Subprime Crisis, the Worst Is Yet to Come

Balance Sheet Time Bombs In Subprime Crisis, the Worst Is Yet to Come

By Beat Balzli and Frank Hornig

Part 3: 'Buy, Buy, Buy'

But the fear of time bombs on balance sheets raises worries on precisely the financial markets on which banks lend money to each other. Despite all efforts by central banks to intervene, everyone in these markets distrusts everyone else.

The year-end rally over funds that won't have to be repaid until January is already underway. No bank wants to risk no longer being able to guarantee its daily monetary transactions. "That's because most of them close their books starting in mid-December," says a London banker. "There's hardly any money available after that."

This scarcity makes borrowing money more costly. Financial managers use freshly borrowed cash primarily to plug the holes in their bank's sizeable investment funds. But the different possible solutions present the funds with a painful choice. Fund managers can either inject new cash, which could easily be consumed in no time, or they could face the prospect of devastating forced sales, which would lead to yet another broad decline in prices for credit products.

This is precisely the acute danger facing Sachsen Funding I, a €2 billion fund. In the next four weeks, Landesbank Baden-Württemberg and other investors will have to decide whether to inject additional cash or close the fund.

A rescue operation is already underway at an investment firm called Ormond Quay, which was responsible for the emergency sale of SachsenLB to Landesbank Baden-Württemberg.

To prevent a collapse, a consortium of German savings banks provided Sachsen Funding I with a €17.3 billion emergency funding package several weeks ago. Of German bank DekaBank's €6 billion share of the package, only about €500 million has been used to date.

WestLB, another German state bank, is also involved in an extensive bailout effort. According to a spokesman, WestLB had to provide its €3.3 billion Kestrel fund with "a credit line to support liquidity."

The credit line, says the WestLB spokesman, "guarantees the full repayment of all debt securities." It has also saved the fund from being downgraded by ratings agency Moody's.

WestLB believes that the prices in the Kestrel portfolio will recover. This reflects the current focus on faith in a world normally dominated by hard numbers. The situation is also tense at Harrier Finance, another WestLB company with assets of $11 billion.

Is Harrier about to face a complete fire sale? This would be all too convenient for some financial jugglers. The first vultures hoping to turn a profit from the debacle are already circling.

One of them is market guru Bill Gross. For the past few days, Gross, who founded German insurance conglomerate Allianz's PIMCO pension fund, has been buying up the supposedly junk securities at bargain-basement prices.

Giants like Goldman Sachs and the Royal Bank of Scotland have been doing the same thing, investing their wealthy customers' money. If the market bounces back, these high stakes players could end up raking in huge profits in the global financial casino.

"If I had the money," says an envious chairman of a German state bank, "all I would do now is buy, buy, buy."

Translated from the German by Christopher Sultan

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