Problems with asset-backed securities grabbed the limelight Thursday, setting off a firestorm in money markets that forced central banks in the U.S. and the euro zone into unscheduled injections of funds.
The abrupt tightening of borrowing conditions in dollar and euro money markets was prompted by problems with three asset-backed funds run by French bank, BNP Paribas. The bank said it was unable to find prices for the funds’ assets in the U.S. credit markets. Liquidity, it said, had dried up suddenly this week.
The U.S. asset-backed market has been hit hard by the fallout from the subprime mortgage market woes. Issuance of securities backed by home loans – the market’s main driver in years past – has plummeted and buyers are few and far between.
“Traders would call this a buyer’s strike,” says Michael Kastner, managing director at Sterling Stamos, an investment partnership with $5 billion in assets under management. “There is uncertainty about the collateral and any paper that comes in is discounted.”