Speculative Onslaught. Crisis of the World Financial System: The Financial Predators had a Ball

Financial Tsunami, Part V


by F. William Engdahl


Colossal Collateral Damage

The multi-trillion dollar US-centered securitization debacle began to unravel in June 2007 with the liquidity crisis in two hedge funds owned by Bear Stearns, one of the world’s largest and most successful investment banks. The funds were heavily invested in sub-prime mortgage securities. The damage soon spread across the Atlantic to a little-known German state-owned bank, IKB. In July 2007, IKB’s wholly-owned conduit, Rhineland Funding, had approximately €20 billion of Asset Backed Commercial Paper (ABCP). In mid-July, investors refused to rollover part of Rhineland Funding’s ABCP. That forced the European Central Bank to inject record volumes of liquidity into the market to keep the banking system liquid.

Rhineland Funding asked IKB to provide a credit line. IKB revealed it didn’t have enough cash or liquid assets to meet the request of its conduit, and was only saved by an emergency €8 billion credit facility provided by its state-owned major shareholder bank, the Kreditanstalt für Wiederaufbau, ironically the bank which led the Marshall Plan reconstruction of war-torn Germany in the late 1940’s. It was soon to become evident to the world that a new Marshall Plan, or some financial equivalent, was urgently needed for the United States economy; however, there were no likely donors stepping up to the plate this time.

The intervention of KfW, rather than stopping the panic, led to reserve hoarding and to a run on all commercial paper issued by international banks’ off-books Structured Investment Vehicles (SIVs).

Asset Backed Commercial Paper was one of the big products of the asset securitization revolution fostered by Greenspan and the US financial establishment. They were the stand-alone creations of the major banks, set up to get risk off the bank’s balance sheet.

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