The credit crunch has claimed its first high-profile resignation in the UK with the departure of Barclays' head of European collateralised debt obligations (CDOs), the explosive debt products that have helped to cause the meltdown.
Edward Cahill, who ran the European CDO business at Barclays Capital, Barclays' investment banking business, resigned on Monday. On Wednesday, two investment funds set up by his business had their credit ratings slashed by Standard & Poor's, the rating agency, because of losses from investments in US mortgage-backed securities.
CDOs are investment products that parcel up different grades of debt - from very risky to the supposedly safe - in a way that gets them high credit ratings. But massive defaults on sub-prime mortgages in the US, which feature in many CDOs, have caused huge losses for institutions and made investors steer clear of any debt they cannot understand.
The downgraded funds were so-called SIV-lites, versions of structured investment vehicles which invest in long-term assets and finance themselves with cheap short-term debt called asset-backed commercial paper (ABCP). Mr Cahill's team has been a leader in setting up SIV-lites for clients.
The commercial paper market has seized up because investors do not trust the credit ratings of the assets contained in the investment funds that issue the debt. US commercial paper plunged yesterday as buyers fled debt linked to sub-prime mortgages. The US Federal Reserve cut the lending rate it charges banks last week to try to get the market going again, but investors are still cashing in their ABCP and moving the money to the haven of US government bonds.
Fitch, the credit rating agency, said banks worldwide had $891bn (£444bn) at risk in ABCP, though it said this was manageable relative to their total assets.
The credit crisis claimed a scalp in Germany, where previously obscure banks have surprised the market with big losses from US sub-prime mortgages. Stefan Leusder, a management board member in charge of capital markets operations at Landesbanken Sachsen, resigned yesterday. The bank said last week it would need a £12bn credit line from other banks to cover itself against potential losses from sub-prime credit exposures.
Meanwhile, the fall-out from the financial markets crisis is set to hang over the hedge fund industry for a year or more as investors delay asking for their money back in the short term.
Much attention is focused on the coming round of redemptions, with many European investors in hedge funds able to ask for their money back before the end of this month. But bankers say many of London's biggest funds have not reported any redemption requests. While that may be good news for now, investors are more likely to wait for computer-driven quantitative funds to recover before making large-scale withdrawals.
Quantitative funds were meant to be a relatively safe way to invest in hedge funds but their models were unable to predict the recent market mania.