Credit crisis turmoil claims new victims

By Stephen Foley in New York and Sean Farrell
Thursday, 21 February 2008

Losses resulting from the credit market turmoil – until now largely limited to the world’s biggest investment banks – are starting to be felt much more widely, by wealthy individuals, local government and even sports teams, presaging a new and potentially litigious phase in the crisis.

Regulators in at least two US states are investigating whether there were any abuses in the auction-rate securities market, it emerged yesterday, while rumours of a wave of selling in complex credit derivatives sent the cost of protection against bond defaults soaring to a record level.

The auction-rate securities market has been the latest domino to fall as fears have spread about the creditworthiness of all kinds of complicated fixed-income investments. Such securities are long-term debt whose interest rates are reset at a weekly or monthly auction, typically earning them a higher value and a lower interest rate.

Local governments and other issuers use these securities to get long-term debt at short-term interest rates, and brokers have steered wealthy clients into these investments as a higher-yielding alternative to cash, but which is almost as safe.

Since last week, Wall Street banks have refused to prop up demand at the regular auctions, and interest rates have soared. The Port Authority of New York and New Jersey, for example, was yesterday paying an 8 per cent interest rate on $100m of its bonds, down from a 20 per cent rate when the previous auction failed last week, but double the rate at the start of the month. The New England Patriots, runners up in the Superbowl, were paying a 20 per cent-plus interest rate at the height of the turmoil, it was revealed yesterday.

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