Assignment 7 - Wary Investors Start to Shun European Banks...

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Wary Investors Start to Shun European Banks By NELSON D. SCHWARTZ and GRAHAM BOWLEY Published: September 12, 2011 When a $225 million loan to BNP Paribas comes due Thursday at Legg Mason’s Western Asset management unit, managers at its money market funds will be exercising caution. Instead of renewing the loan as they would have as recently as two months ago, they are looking to park investors’ money elsewhere, avoiding BNP and other Continental banks in favor of institutions in Scandinavia, Canada and Britain. Even as European investors race to abandon shares in French banks, on this side of the Atlantic, banks, brokerages and other American financial institutions are quietly reducing their exposure too, turning down requests for fresh loans from the euro currency region and seeking alternative investments. In August, American money funds and other suppliers of short-term credit chose not to refinance roughly $50 billion of debt issued by European banks, a drop of 14 percent, according to JPMorgan research. Traders are so worried that they are forcing French banks like Société Générale and BNP Paribas to pay more to borrow dollars — and they often can do so only for a week or less. “Money market managers in the U.S. continue to prune risk,” said Alex Roever, who tracks short-term credit markets for JPMorgan Chase. “The issue is headline risk; fund managers may be comfortable with the banks’ credit, but many are hearing from shareholders worried by what they have read about French banks.” Unlike their American counterparts, France’s biggest banks are more dependent on short-term funding. Money market funds in the United States have been among the biggest lenders, lending $161 billion to French banks in August, although that is down 39 percent from a month earlier. “It hasn’t been a wholesale pullback,” Mr. Roever said. In 2008, after the collapse of Lehman Brothers — when a key money market fund sustained huge losses on Lehman debt and investors started pulling their money out of the funds — he said, “everybody shut off at once. It was like a cliff. This time the pullback has been more gradual.” It’s not just money market funds that are getting cold feet. On Wall Street, some big American banks have become wary of derivatives tied to French banks like Société Générale and BNP Paribas, several traders said. The two French giants are major international players in the derivatives arena, so a pullback would hurt egos and the bottom line
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of both companies. Derivatives are investment instruments whose value is tied to another
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