Australia's biggest investment bank, Macquarie, has become the latest local fund manager to confirm its potential exposure to the US subprime mortgage market. Two of its funds face losses of up to 25 per cent, or as much as $300 million.
Macquarie has made its name around the world for delivering big returns for investors.
That global reputation is a key selling point in Macquarie Fortress Investments (MFI), a retail arm managing high returns for small investors prepared to take a risk.
Some of that risk has been in the US mortgage market and last night, Macquarie told investors that two high-yield funds might be hurt by the widening crisis in subprime mortgage defaults.
In a statement to the Australian Stock Exchange last night, MFI director Peter Lucas said imbalances caused by a spillover from subprime defaults could mean losses of up to 25 per cent.
"While Fortress notes have no direct exposure to US subprime mortgages, the portfolio continues to be adversely impacted by price volatility in the US credit markets," a statement said.
Mr Lucas said while there was no reason to believe Macquarie would not be able to meet interest and principal payments, he was working to avoid a margin call when worried lenders call in their loans.
"As the market value of the portfolio has decreased further, it has become necessary for the investment manager to sell selected loans and apply the proceeds to reduce the leverage facility so that the loan-to-value ratio meets the applicable borrowing covenants," the statement said.
Macquarie's Fortress Investments joins two other Australian funds exposed to the US subprime crisis, Basis Capital and Absolute Capital, which have flagged potential losses over the past fortnight.
Wall Street losses
There was also more bad news at the subprime epicentre this morning.
The Dow Jones Industrial Average plunged more than 1 per cent in late trade after two home loan insurers said their billion-dollar stake in a subprime mortgage company might be worthless.
The late news caused a sell off in the banking sector, erasing earlier gains on Wall Street.
Still, market watchers like UBS senior economist Paul Donovan are continuing to focus on the fundamentals, such as a strong underlying US economy.
"It's essentially an issue of confidence - are investors willing to take risks or not?" he said.
But Mr Donovan says widening subprime mortgage defaults first need to be contained.
"If that spreads and we see lenders refusing credit elsewhere, it becomes more significant," he said.
Today's good news in the US was consumer confidence for June, which hit its highest level in almost six years.
But the next reading will be critical, and any sign that Americans are dramatically trimming household budgets on mortgage concerns could put a shadow across assurances that the world's biggest economy is in the best of health.
