Here we go again. Yesterday’s news of trouble at JP Morgan, America’s second biggest bank, is today matched by Royal Bank of Scotland, the UK’s second largest. RBS is another huge loser in the American subprime mortage market and is set to announce big writedowns next week.

RBS is understood to be seeking to raise capital from its shareholders in a rights issue thought to amount to £10 billion ($20bn), which is probably the biggest rights issue ever demanded in the UK.

The bank, which bought troubled NatWest and ABM Amro, has been running on low capital ratios for quite a while. It also has major exposure to subprime debt instruments. It has been linked with Spain’s Banco Santander for many years.

When such a major player is caught short like this, it brings home the extent and depth of the crisis in transatlantic financial markets, with all the knockon effects to the rest of the world.

Vince Cable, a spokesmen on Treasury matters who carries more weight than the Treasury these days, believes all the banks should follow the example of RBS, since they will need a great deal of liquidity from the Bank of England and that should be underwritten by shareholders, not taxpayers.

Next week’s announcement will be awaited with some trepidation.

With the U.S. now firmly in recession, Syntagma looks at the causes of this spectacular downturn and speculates that the Iraq war may have a lot to do with it.

“The American economy is now in recession. A slew of new data clearly reveals both a marked downturn in activity, combined with a rise in inflation — something not seen since the stubborn “stagflation” period of the 1970s. Some economists expect a robust return to growth later in the year off the backs of aggressive rate cuts by the Fed…”

Read the article here.

In another piece today, our sister site examines banks’ attitude to risk and how securitization let the side down, handing huge advantages to authoritarian Asian regimes.

“In the old days, banks took the risk of lending money on themselves and ensured that borrowers would be able to pay it back over time. Securitization means that they can lend to any Tom, Dick or Harriet, package up the debts into large parcels of small slices from many borrowers, and sell them onto other banks and finance houses.”

Read the article here.

In a move designed to make money, said the “Sage of Omaha”, legendary investor Warren Buffett has offered to underwrite $800 billion (£400bn) of U.S. municipal bonds.

The offer goes to three “monoline” bond insurers, Ambac Financial, MBIA and Financial Guaranty Insurance. One has already rejected the deal, and he is still awaiting reponses from the other two, although one of them is making favourable noises.

The move certainly perked up global stock markets yesterday, as the monolines are seen as the second line of defence against the sub-prime mortgage fiasco by propping up banks’ balance sheets in the event of meltdown.

Traditionally, the bond insurers mainly concentrate on municipal risk, but they too got caught up in the collective madness of sub-prime lending for the same reason respectable banks did : greed for perceived easy money.

However, the monolines are now short of capital and are being hit by downgrades from the rating agencies.

T J Marta, fixed income strategist at RBC Capital Markets, said it was a coup for bond insurers, which could help them avoid “the doomsday scenario”.

Let us hope so.

The United States’ Federal Reserve has just cut base rates by a whopping 75 basis points or 0.75 percent, indicating that it regards recession as more likely than not.

Recession now seems inevitable

Syntagma has an in-depth analysis of the upcoming recession. Here’s a taster :

As we’ve been saying here in Syntagma for some months, a long, deep worldwide recession now looks more likely than not. Opinions are hardening among key players, principally in America and Britain.

Yesterday, the Wall Street Journal proclaimed : “U.S. warning signs point toward deep recession”.

Now even the insurance companies, or Monolines, that underwrite possible defaults, are also in trouble, with two of the biggest in the U.S. said to be close to Chapter 11 status (a form of bankruptcy protection against creditors).

Clearly, with the Fed in near panic mode something nasty is moving in the undergrowth.