credit update 27 09 07

A business lobby group lambasted the UK regulatory system for its failure in the Northern Rock crisis, saying that "a run on a bank is something that happens in a banana republic." At the same time, it called for a revamp of the entire regulatory regime but warned against heavy-handed regulation that would stifle competition and innovation. Meanwhile, takeover initiatives of Northern Rock are in their early stages as Chris Flowers, through his private equity firm JC Flowers, has been given access to Northern Rock's books after submitting a takeover proposal for the bank. JC Flowers' offer would keep the bank together while other potential bidders plan to break the stricken lender up and divide the assets between them. No price has yet been proposed.

A breath of fresh air for Bear Stearns as reports surface that several investors, including Warren Buffet, have expressed interest in buying part of the bank. Bear Stearns is among the hardest hit of the subprime mortgage turmoil with its two hedge funds going bust and third-quarter profits declining 61%. Bear Stearns, however, said the worst is over.

Observers of the dollar fear the possibility of Saudi and other Middle-East shiekdoms cutting their currencies' peg to the US dollar. Many of these countries are recently under inflationary pressure from rising oil prices and local construction boom which would normally necessitate an increase in interest rate to keep inflation in check. Basic economic differences between US and these countries could perforce break their dollar peg, adversely affecting the US dollar.

The two-day strike by the United Auto Workers Union of General Motors ended in a groundbreaking agreement which takes $50 bn of future health-care obligations off GM's books and may transform the competitive landscape of the US auto industry.

The US Securities and Exchange Commission has initiated an investigation specifically to examine whether credit ratings agencies had "compromised their impartiality" when they rated various mortgage-backed securities and at the same time provided advice to firms on how to package them so as to get higher credit rating. Another point of contention is the ratings' agencies receiving of fees from the investment firms and the potential conflict of interest it creates.