MIKE PEACOCK, Reuters
December 20, 2007 at 10:04 AM EST

LONDON — — — Strain in the money markets eased on Thursday, following a concerted central bank pump priming operation, but fresh losses at the fifth largest U.S. investment bank will test the tentative improvement in sentiment.

Bear Stearns [BSC-N] reported a fourth quarter write-down of $1.9-billion (U.S.) on mortgage-related assets and an overall quarterly loss of $854-million, after taking a beating on risky subprime mortgage investments.

London interbank offered rates for sterling, euros and dollars all fell after co-ordinated central bank cash offers were eagerly snapped up on Wednesday by banks seeking funds.

Benchmark sterling rates dropped for the sixth session running, while dollar rates have now been falling for over two weeks. Bids for the U.S. Federal Reserve's unprecedented $20-billion auction of 28-day money outstripped the amount on offer more than three times, and parallel dollar auctions by the European Central Bank and Swiss National Bank were gobbled up.

The Fed will offer another $20-billion later on Thursday, the results of which will be known next week.

But many experts believe that while the joint central bank action will help to reduce the liquidity squeeze, it will not solve the underlying problems.

“There still is a lot of nervousness and although (the central banks) are providing a short-term salve to the interbank (market), the underlying question is still one of confidence in the markets,” said Justin Urquart Stewart, a director at 7 Investment Management.
The drip-drip of bad news from major banks continues to erode what little investor confidence has been re-established.

Morgan Stanley [MS-N], the second largest U.S. investment bank, on Wednesday reported an additional $5.7-billion mortgage-related write-down in November and said it had written off a total of about $9.4-billion in the fourth quarter.

Bear Stearns said it was “upset” with its 2007 results and would pay no bonuses to its top executives.

“Bear Stearns is going to be a very big catalyst. They're really one of the ones that started this whole mess with the collapse of their hedge funds over the summer,” said Tim Smalls, head of U.S. stock trading at brokerage firm Execution LLC in Greenwich, Connecticut.
U.S. subprime mortgages — lent to people ill-equipped to pay them back — were bundled up into complex financial products and sold on around the globe.

Globe and Mail - Money market tension eases, Bear Stearns takes hit

Only when uncertainty about where the exposure lies is resolved are commercial banks likely to lend money freely to each other again on the interbank market.

Banks in Britain, France and Germany have also been damaged while Canadian Imperial Bank of Commerce [CM-T] said late on Wednesday there was a “reasonably high probability” that it will report a large charge in its first-quarter results, as pain from its exposure to the U.S. subprime home loan market deepens.

Financial firms have to date written down more than $65-billion in credit-related losses. With official estimates of total losses from the subprime mortgage debacle around $300-billion, investors are braced for further shocks.

Fresh doubt has been cast on a planned “superfund” to bail out investment vehicles tied to the subprime mortgage market.
Japan's top three banks plan to reject a request to help finance the U.S.-led rescue fund, financial sources said on Thursday.
Sumitomo Mitsui Financial Group, Mitsubishi UFJ Financial Group [MTU-N]and Mizuho Financial Group [MFG-N] had each been asked to commit $5-billion to the U.S.-led fund.

Reports have circulated that some U.S. banks which had been expected to help out were also losing interest as they doubted its ability to provide a solution to the credit crunch.

The Bank of Japan kept interest rates unchanged at 0.5 per cent on Thursday and a policy hawk dropped his lone call for a rate rise with the nation's growth prospects looking murky.

Many investors think the central bank will not raise rates until the middle of next year as the global credit crisis and lacklustre domestic demand raise concern about Japan's growth.

The Fed, Bank of Canada and Bank of England have all lowered official interest rates, in the face of the credit crunch, but the European Central Bank has not followed suit.