Ahead of
the US Federal Reserve meeting that is expected to cut US interest rates, the
London-based Sunday Times has reported that global investment banks are likely
to reveal a loss of about $30 billion due to bad debts linked to the global credit
crunch.Analysts
are of the opinion that the Fed would step in to prevent a downturn in the housing
market and the credit crunch from severely affecting the US economy by reducing
interest rates from 5.25 per cent by 0.25 or 0.5 percentage points at its tomorrow''s
meeting. They
say that lower interest costs would prompt consumers to spend and invest more,
thus revitalising the economy. Moreover, former Fed chairman, Alal Greensopan
has been quoted as saying, here was a "very large" inventory of unsold,
newly built homes putting pressure on builders to sell them quickly. As
a result, "we have the capability of far bigger price declines," which
will pinch home equity, lead to more defaults on sub prime mortgages and pressure
consumer spending, Greenspan was quoted by The Wall Street Journal. The
rate cut expected to be announced tomorrow, would be the first since June 2006
and the first under the leadership of Ben Bernanke, who took over from Alan Greenspan
as Fed chairman in February last year. The
current debt market crisis, caused by the US sub prime market crisis, has led
to unwillingness among investors to reinvest in some loans. Since these sub-prime
loans have been sold on to banks and other institutions, it has been difficult
to gauge who has exposure to the losses, and to what extent they threaten the
lenders. Therefore,
apart from their involvement in bad debt, investment banks are also expected to
reveal their exposure to commercial paper that helps raise short-term cash flows,
which are rolled over and reinvested on maturity.
also see : General
reports on Banks & Financial Institutions
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