credit update 17 09 07

Asian stock markets stepped up Friday's close with the Nikkei up 1.94%, Hang Seng up 1.47%, All Ords up 1.14% and Straits Times up 0.91%. The Asian credit market benchmarks chalked a general tightening with the iTraxx Asia ex Japan edging 1bp tighter.

Bank of England's bail-out of Northen Rock sparked a fresh round of debates on the role of central banks. This came only two days after BOE Governor Mervyn King said that intervention would "encourage excessive risk-taking, and sows the seeds of a future financial crisis" For some, this is exactly what the BOE has done in granting funding to the beleaguered firm, prompting critics to label BOE as a paper tiger. Some say that had BOE not been hesitant to inject liquidity into the system, it would have no need for a turnabout.

The dust has hardly settled on the Bank of England's bail-out of Northern Rock that rumours are afloat that several high street names and European Banks are circling around as Northern Rock becomes a potential target for takeovers.

Alan Greenspan, in his memoir "The Age of Turbulence: Adventures in a New World," criticized the Bush administration for putting political imperatives ahead of sound economic policies. Some, however, put a part of the blame for the current financial woes on Greenspan himself for being too eager to cut rates. The eponymous "Greenspan put" had allowed for credits to be too cheap, setting up the stage for the hamartia called US subprime crisis.

The Financial Services Rountable, a group representing the 100 largest financial services firms in the US, adds its voice to the chorus of those calling for a better regulation of the US financial system. Aiming to boost competitiveness of the US capital markets, it propounds a "principles-based" approach to regulation. It adds that such system might have helped identify problems with the subprime mortgages sooner.

The markets wait for the figures from Morgan Stanley, Goldman Sachs, Bear Stearns and Lehman Brothers this week. The markets are particularly anxious about their reports as they are expected to be among the hardest hit on their heavy exposure to US mortgage-backed securities. However, some doubt whether the figures will provide accurate picture given the relative discretion allowed by accounting rules, particularly in marking to market trading assets. Meanwhile, Merrill Lynch in its regulatory filing with the Securities and Exchange Commission disclosed a significant markdown on assets such as mortgage-backed securities, leveraged loan commitments and collateralized debt obligations in their third quarter earnings.

The friction between China and the US over trade heats up as China threatened US with litigation in the World Trade Organization on the imposition by the US of it so-called "countervailing duties" on China's paper exports.

Barclays shareholders approved the company's bid for ABN AMRO on Friday.