Banks dominated the headlines during September, with the Lehman Brothers bankruptcy sparking a further bout of risk aversion among investors. Lehman is the biggest bond default and Washington Mutual the biggest bank default in history. Lehman defaulted on $143 billion of listed bonds, a figure that compares with $72 billion when Russia defaulted in 1998.Other notable bank sector events included Bank of America's purchase of Merrill Lynch, the announcements by Goldman Sachs and Morgan Stanley that they were changing their status to ordinary banks - leaving Wall Street without a single investment bank -an agreed all-share offer from Lloyds TSB for HBOS and the partial nationalisation of Bradford & Bingley.In addition, the Irish government guaranteed all senior debt and depositors in Irish banks. Finally, the US proposed a $700 billion rescue to ease the pressure on banks' balance sheets. The terms of the proposal were opaque. Public pressure against the programme mounted, with many believing it represented a sunk cost.Every asset purchased by the rescue vehicle would, however, have to fall to zero for this to be the case. The plan was passed in early October in what was a significant step forward but not a definitive resolution.The New Star High Yield Bond Fund's direct exposure to defaults has been limited. Bank debt, including more senior bonds, fell significantly last month, however, dragging down other asset prices. Furthermore, the interbank lending market deteriorated further. This had negative short-term funding implications for banks and increasingly affected other companies.
