April is supposed to be the cruellest month. But for the financial markets, this March will take some beating. Bank failures, hedge fund blow-ups, massive write-downs and the worst hedge fund performance figures since the long-term capital management crisis in 1998, the last month had it all. Investors may be hoping the combination of aggressive central bank interventions plus the latest round of bank capital raisings will provide some respite. But few would bet against more cruel months to come.
The March market ructions were triggered by problems at two giant-structured investment vehicles. Fears of a resulting fire sale of US mortgage securities led to a vicious spiral of price falls, mark-to-market losses, the collapse of a number of high-profile hedge funds such as Peloton Computer Enterprises Ltd and Carlyle Capital Corp., the virtual closure of the repo market for increasingly illiquid assets and ultimately the collapse of Bear Stearns Companies Inc. As a result, fears of further write-downs and new questions about bank solvency overshadowed an otherwise more upbeat first quarter reporting season.
Bankers will be hoping the eye of the storm has now passed. That will depend in large part on the extent to which there are still large leveraged portfolios of credit securities lurking in the markets that might yet rebound on the banking system. But at least April begins with encouraging signs that banks are no longer in denial. The latest round of write-downs from UBS AG and Deutsche Bank plus the new capital raisings from UBS and Lehman Brothers Holdings Inc. suggest a new willingness to draw a line under recent losses.
Even so, any respite now may only prove temporary. The US housing downturn shows no sign of slowing—and may even be accelerating. Nor is it clear how far or how fast the credit crunch will spread to the real economy in the US and Europe, triggering wider credit problems. Meanwhile, the markets must still navigate September and October, when US mortgage resets are set to peak. March may have been the cruellest month—but only until the next one.