Bloomberg News

Fed Says Banks Eased Credit to Hedge Funds, Private Equity

January 13, 2011

Wall Street’s largest dealers during the fourth quarter eased credit terms to hedge funds and private-equity firms that borrow against securities while provisions for private derivatives trades were little-changed, according to the Federal Reserve.

More banks said credit terms “eased somewhat” than said terms “tightened somewhat” in the three months ended in December, the Fed said today in its December 2010 financing survey. Hedge funds and other investors tried harder to negotiate favorable price terms for deals, with 55 percent of dealers saying that clients “increased somewhat” or “increased considerably” their demands for concessions.

Increased competition from rivals and improvements in the general market functioning were the main reason that terms were loosened, according to the survey released by the Fed in Washington. Nine out of 10 respondents cited each factor as “very important” or “somewhat important” in their easing of terms.

The Fed started the survey in part because the financial crisis “highlighted that a significant volume of credit intermediation has moved outside of the traditional banking sector,” the central bank said last year.

High Yield

Demand for funding of high-yield, high-risk corporate bonds “increased somewhat” in the three months ended in December compared with the beginning of 2010, according to five of 12 bank responses to the survey. Banks were more willing to trade high-yield bonds with hedge funds, private equity funds and other private investors compared with insurance companies, pension funds or mutual funds, according to the survey.

A minority of banks said legal uncertainties regarding how foreclosure documents have been handled has “worsened somewhat” the functioning of the residential-mortgage-backed securities market, according to four of 13 respondents.

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.


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