Credit markets are tightening as fears grow that another big financial institution somewhere in the world, and probably the US, is in trouble. That’s a feeling that hasn’t been helped by the bail out of two banks in the past few days.

On the weekend in the US a small ($750 million assets) bank in Kansas became the ninth US bank to fail this year when it was closed by regulators and Denmark’s over-priced housing market has claimed its first victim.

The Danish Central Bank and a group of private lenders will acquire Roskilde Bank A/S about six weeks after it was bailed out by the central bank. That was the first bailout in Denmark for 15 years and the latest announcement came after no buyers were found for the regional bank.

The central bank and its unnamed partners will inject $US1 billion into Roskilde, which will in turn write-down the value of its loans made to failing home builders by around $US500 million.

It’s effectively a form of quasi-nationalisation with the central bank there to anchor the deal and provide security; its not like the bailout and nationalisation of the Northern Rock Bank in the UK.

On the economic front, sales of existing homes in the US rose by more than expected last month, but the overhang of unsold houses and median prices continued to put a dampener on any optimism.

Freddie Mac sold short term notes at a slightly smaller premium to Treasury notes than last week’s huge 1.13% premium on an issue of five year notes.

But investors were also eyeing the biggest ever auction by the US Treasury of two year notes this Friday and five year bonds the day before. A total of $US54 billion will be sold in a major test of market support for the US government’s creditworthiness which is under pressure over the unresolved futures of Fannie Mae and Freddie Mac.

So it was no wonder that the Dow sank 241 points, or 2% and the S&P 500 was down by almost 2%. There are some very nervous folk in the markets who have no idea where the next problem is going to erupt.

Banking major, JPMorgan Chase & Co. didn’t help when it revealed that its holdings of $US1.2 billion in preferred shares in Fannie and Freddie had halved in value this month alone.

It isn’t alone, around 38 smaller US banks own these preferred shares and are facing losses. Some larger regional banks have unquantified holdings of these shares. There could be $US30 billion or more held by financial groups across the US. Any bailout of the two mortgage groups that involves dilution of existing holdings will produce huge losses for these smaller banks.

Peter Fray

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