Investors run for cover as Dow plunges 416 points, worst day since Sept. 2001

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Latest casualty in the sub-prime crisis...

NetBank shut down by federal regulators
September 28 2007: FDIC appointed receiver for the online bank, which failed because of loan defaults and other problems.

NetBank Inc., an online bank with $2.5 billion in assets, was shut down by the government on Friday because of an unsustainable level of mortgage defaults. It was the largest thrift to fail since the tail end of the savings and loan crisis more than 14 years ago. Federal regulators appointed the Federal Deposit Insurance Corp. as a receiver for Alpharetta, Ga.-based NetBank.

While dozens of mortgage companies have closed due to soaring defaults of home loans made to borrowers with weak, or subprime, credit, those problems previously had occurred among non-bank lenders, such as New Century Financial Corp. NetBank is federally regulated. Loose mortgage standards in recent years - especially among lenders catering to subprime borrowers - have resulted in a spike in home loan defaults.

The FDIC said Friday that $1.5 billion of NetBank's insured deposits will be assumed by ING Bank, part of Dutch financial giant ING Groep NV. NetBank, which had no physical branches, sustained significant losses last year "primarily due to early payment defaults on loans sold, weak underwriting, poor documentation, a lack of proper controls and failed business strategies," the Office of Thrift Supervision said in a statement.

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Recession chatter gets louder
September 28 2007: The fear factor has spiked in recent weeks as a series of indicators signal that Wall Street's troubles are starting to spread to Main Street.

Housing price declines. Slowing job creation. Profit warnings from the country's biggest retailers. To an Econ 101 student, those are telltale signs of an imminent recession. Not surprisingly, the R-word has dominated talk among bankers for weeks. "We're very close to stall speed in the economy," says Paul Kasriel, director of economic research at Northern Trust. And it's not just the usual Chicken Littles talking about it: Everyone from top auto executives to normally ebullient tech venture capitalists are making noises about the slowing economy. Former Treasury Secretary Larry Summers, now at hedge fund D. E. Shaw, is adamant that there's a greater than 50% chance of a recession.

So what's really happening? By most economists' terms, a recession is defined as two or more consecutive quarters of GDP decline -- something we haven't seen since 1991. By that narrow definition we're not even close. Of 50-plus economists surveyed by research firm Blue Chip Economic Indicators, not one is predicting a recession. They still expect GDP to grow 2.6% next year. But the broader definition, one put out by the National Bureau of Economic Research, is simply a "significant decline in economic activity, spread across the economy, lasting more than a few months." By that measure, many say the sky is falling.

Until now, problems with the economy have remained within the financial sector, with most of the pain hitting mortgage companies and investment banks. But in recent weeks a few key signs show that Wall Street's problems are seeping into the rest of the economy. "This is no longer just a Manhattan thing. It's turning into a Queens and Brooklyn kind of problem too," says Maury Harris, chief U.S. economist at UBS, of the way the downturn in the economy is affecting middle and lower-income households.

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NetBank founders in a world of hurt...

Could they lose $900K?
September 29 2007: When NetBank was shut down by federal regulators Friday, the founders of a young software company worried they could be forced into a cash crisis.

After NetBank Inc. was shut down by federal regulators Friday, the founders of Applied Cognetics feared it could force their young firm into a cash crisis. Applied Cognetics, a software development and online marketing firm based in Brooklyn, N.Y., has about $1 million in deposits in NetBank, an online bank with $2.5 billion in assets that regulators closed Friday because of an unsustainable level of mortgage defaults.

Although the FDIC insures bank deposits of up to $100,000, Applied Cognetics president Chris Colthrust and his four business partners aren't sure what will happen to the remainder of their account. "Every penny I saved for the last 10 years was in this," said Colthrust, 39. "Basically all of our operating funds and accounts were in that bank. Everything we've worked for the last 2 years [could be] up in smoke."

A cash-intensive business, the company has more than $120,000 in accounts receivable due Monday. Colthrust and his partners will be working the phones Monday morning to alert media buyers and others the company owes that its payments are going to be delayed. "Not only is it extremely embarrassing but shocking," Colthrust said. To meet their obligations, he worries they'll have to liquidate any of their personal savings and borrow money from friends and family until the NetBank situation is sorted out.

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Greenspan says inflation likely...

Greenspan warns of inflation
Sunday 30th September, 2007 - Speaking on the BBC over the weekend, former Federal Reserve chairman Alan Greenspan said the risk of a U.S recession had increased.

Mr Greenspan warned that slowing housing markets and recent market turmoil sparked by a crisis in US sub-prime mortgages posed a greater threat to economic growth. But, he added that he did not anticipate a significant recession in the U.S or the U.K.

Mr Greenspan, who has predicted that inflation is set to rise in the longer term, said the days of low inflation are gone. Often criticised for cutting interest rates too quickly in response to signs of financial or economic weakness, he argued that central bankers have a tough task managing asset bubbles.

In the U.S, sales of new homes tumbled last month to their lowest annual level in over seven years. The increased supply of houses on the market is adding further downward pressure on prices.

Greenspan warns of inflation

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Bernanke takin' it on the chin...

Bernanke hears from Citigroup chief after Fed decision
October 3 2007: Fed chairman spoke with Citigroup's Robert Rubin, other bigwigs, in August after deciding to leave rates unchanged during credit crunch.

WASHINGTON -- He wasn't in a boiler room Aug. 8, but Federal Reserve Chairman Ben Bernanke may have been feeling the heat when he talked by phone with Citigroup's Robert Rubin and consulted with a host of bigtime financial players amid a worsening credit crunch that pushed Wall Street into a nosedive.

Rubin, who is chairman of Citigroup Inc.'s executive committee, and was President Clinton's Treasury Secretary, telephoned the Fed chief at 5 p.m. on Aug. 8. That was one day after Bernanke and his central bank colleagues decided to leave a key interest rate unchanged even as fears gripped Wall Street that fallout from the housing slump, a mortgage meltdown and a deepening credit crunch might short-circuit the economic expansion.

That information was contained in documents obtained under the Freedom of Information Act by Ken Thomas, a lecturer in finance at the University of Pennsylvania's Wharton School. Thomas provided the documents to The Associated Press. The information simply lists Bernanke's contacts through the day. It does not provide information about the content of those meetings or telephone calls. But it does provide a rare glimpse into one of Washington's most mysterious institutions.

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Subprime: Bailout backlash
October 3 2007: Not everyone favors helping troubled homeowners, lenders and investors stung by the subprime crisis.

As the list of proposed remedies to the subprime crisis has grown longer, the chorus against helping troubled borrowers has gotten louder. On Wednesday the Democrats called on the White House to increase funding and implement proposals for foreclosure prevention. But judging from the hundreds of reader responses CNNMoney.com has received in recent weeks, "foreclosure prevention" sounds a lot like "bailout" to many Americans, and they don't like it one bit.

"Let the lumps fall where they may. No bailouts! The greedy banks, local gov'ts, realtors and developers caused it and they deserve this beating." - posted by John, Richmond, Va.

"No rewards to the people that [k]new buying was way out of [their] means. They get rewarded for [being] irresponsible and I get nothing for being responsible!" - posted by Kurt, Torrance, Calif.

Joseph Mason, an associate professor of finance at Drexel University and a senior fellow at Wharton, argues in a research paper released Wednesday that proposed remedies could actually make things worse and even that troubled borrowers have gotten some benefit from their loans. "It's tough to find the harm," said Mason.

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Not gonna be good...

Wall Street waits for jobs report
October 4 2007: Futures little changed as investors await government jobs report for clues on future Fed rate cuts.

U.S. stocks could be on hold Thursday as investors await the closely watched employment report due at the end of the week for clues about the future direction of interest rates. At 8:23 a.m. ET, futures were narrowly higher, with a comparison to fair value pointing to a flat to slightly positive open for Wall Street.

Traders are anxious ahead of the September jobs report due out Friday. The government report is expected to show a gain of 100,000 jobs after a decline in August, according to economists surveyed by Briefing.com. The number is likely to play a big factor as the Federal Reserve decides whether or not to keep cutting interest rates. A weak report could give policymakers room to keep lowering rates, while a much stronger report could rattle investors hoping for more cuts from the Fed.

In addition to the rate outlook, investors will be looking to the report for signs of economic weakness. A number that comes in well below expectations could reignite recession fears and overshadow any boost stocks get from the likelihood of more rate cuts. "I can't see there being that much movement Thursday," said Mark Vitner, senior economist with Wachovia. He said it will take a number close to the consensus forecast on payroll growth Friday to give a lift to markets, while the risks to the market from either a too weak or two strong are likely to keep investors nervous ahead of the report.

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Unemployment claims soar
October 4 2007: Federal government says 317,000 applied for unemployment benefits in most recent week, a potential sign that labor market is slowing due to housing slump.

WASHINGTON -- The number of newly laid off workers filing claims for unemployment benefits shot up last week by the biggest amount in four months. The Labor Department reported a total of 317,000 applications for unemployment benefits last week, an increase of 16,000 from the previous week. It was the biggest gain since jobless claims rose 18,000 during the week of May 9.

The rise was bigger than analysts had expected and could be a further sign that the labor market is slowing under the impact of the worst slump in housing in 16 years and a severe credit crunch that roiled global markets in August. Labor Department analysts said that the two-day auto strike involving General Motors did not appear to have a significant impact on the claims figures last week, according to preliminary information from the states.

The increase in claims last week followed two weeks of declines. The four-week average for claims totaled 312,750, up only slightly from the previous week. Analysts believe the unemployment rate probably rose in September to 4.7 percent, up from 4.6 percent in August, although they are expecting that businesses added 100,000 jobs to their payrolls.

That would be an improvement from the net loss of 4,000 jobs in August, which had been the first monthly job loss in four years. The employment data for September will be released Friday. The unemployment report is being closely followed by Wall Street, where investors believe it will provide the key piece of data the Federal Reserve will need to decide whether to cut interest rates further.

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Fed tryin' to cool the subprime meltdown...

FDIC to mortgage servicers: Freeze ARM rates
October 5 2007: Top bank regulator suggests industry cuts losses now to prevent foreclosures.

The heat on U.S. mortgage lenders and servicers was turned up a few degrees this week when the country's chief bank regulator publicly proposed that they permanently freeze interest rates on subprime adjustable-rate mortgages (ARMs) for many homeowners. "Keep it at the starter rate. Convert it into a fixed rate. Make it permanent. And get on with it," Federal Deposit Insurance Corp. Chairman Sheila Bair said in prepared remarks at an investor's conference.

ARMs often have a low introductory interest rate for two or three years and then reset to much higher levels. Roughly 1.3 million subprime ARMs are due for a rate reset between now and the end of 2008, according to data from First American Loan Performance.

Bair proposed that servicers convert only those ARMs that haven't reset yet and only for borrowers who are current in their payments and occupy their homes. Loans taken out by speculators who don't live in the homes they bought would not qualify for the automatic conversion.

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Record-breaking day on Wall Street
October 5 2007: After jobs report, S&P 500 closes at all-time high; Dow hits all-time high during the session, but closes short of its record; Nasdaq hits 6-1/2 year high; bonds slump.

Stocks rallied Friday after a strong September jobs report raised bets that the economy will be able to avoid a recession, despite the drag from the housing and mortgage market meltdown. Bond prices slumped, boosting the corresponding yields on bets that if the economy is holding up better than thought, the Fed won't necessarily need to keep cutting interest rates.

The Dow Jones industrial average gained almost 0.7 percent, briefly hitting a record trading high of 14,123.72 during the session before retreating. The broader S&P 500 index added almost 1 percent and closed at a new all-time high. During the session, the S&P 500 briefly hit a new all-time intraday high of 1561.91 before scaling back a bit.

The tech-heavy Nasdaq composite gained around 1.7 percent, closing at a fresh 2007 record and its highest point since Feb. 2001. The third-quarter earnings reporting period unofficially kicks off next week with a pair of Dow components - Alcoa on Tuesday and General Electric on Friday.

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Whole lot of hurtin' goin' on...

$20B worth of subprime pain
October 6 2007: Banks have paid dearly for their big bets on mortgage securities. And the toll keeps mounting.

The cost of the subprime crisis continues to mount on Wall Street. To date, the total stands at nearly $20 billion. On Friday, Merrill Lynch said it would take a writedown totaling $5.5 billion in large part because of its exposure to subprime mortgages. Merrill was only the latest bank in recent weeks to reveal how badly its bottom line has suffered from the mortgage meltdown that began over the summer.

Just a few days ago, Citigroup, UBS and Deutsche Bank all revealed just how badly their bottom lines have suffered. Total hit: $9.8 billion. Last month, Bear Stearns, Lehman Brothers, Goldman Sachs and Morgan Stanley made similar announcements, collectively racking up $4.3 billion worth of charges.

The $20 billion total so far could go even higher. JPMorgan Chase, which is set to deliver quarterly results this month, has yet to reveal how it has been impacted by the credit crisis. In most instances, the writedowns originated from securities backed by subprime mortgages that turned toxic after homeowners began defaulting on their loan payments. To make matters worse, banks got stuck with loans that companies agreed to take when dealmaking was still robust on Wall Street.

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More bank losses...

Bank of America, JPMorgan set for $3B losses -report
October 8 2007: These losses would bring the total writedowns from subprime-related securities to $20 billion, said the Financial Times.

Bank of America and JPMorgan Chase are thought to be on the verge of announcing combined losses of $3 billion from mortgage-backed securities and leveraged loans when they report third-quarter earnings this month, according to a news report today. The announcements would bring total losses at the world's leading banks from subprime-related assets to $20 billion, said The Financial Times.

JPMorgan is expected to announce losses on leveraged loans of $1.4 billion, Sanford Bernstein analyst Howard Mason said in the report. He also anticipates it will suffer an additional $700 million in writedowns on mortgages and mortgage-backed securities, said FT. Bank of America is expected to see around $700 million in leveraged loan losses and mortgage writedowns of $300 million.

JPMorgan and BoA do a lot of lending to private equity firms, so most of their writedowns will come from leveraged loan commitments they'd have to take a loss on if they sold now, the paper reported. Merrill Lynch reported the largest credit-related losses at $5 billion. UBS said it had $3.7 billion in writedowns, while Deutsche Bank had $3.1 billion and Citigroup reported $2.7 billion. Washington Mutual reported a hit of $410 million last week. Smaller banks such as Wachovia are also expected to announce writedowns proportionate to their size.

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Smells like Enron...

Countrywide CEO's new stock sales raise eyebrows
October 11 2007: The lender's chief executive Angelo Mozilo is accused of 'stuffing his pockets' amid shareholder losses; September mortgage fundings sink 44 percent.

Angelo Mozilo, chairman and chief executive of mortgage lender Countrywide Financial, is under new scrutiny over the timing of stock sales amid massive shareholder losses. Richard Moore, the state treasurer in North Carolina, has asked the U.S. Securities and Exchange Commission to investigate Mozilo's sales in which the chief executive exercised options for 139,918 shares of common stock on Wednesday for $9.94 apiece, then sold all of the shares on the same day for $18.74 apiece. The stock sale, reported in Securities and Exchange Commission filing, was conducted under a prearranged 10b5-1 trading plan, which allows a company insider to set up a program in advance for such transactions and proceed with them even if he or she comes into possession of material non-public information.

"As one of many investors who have felt the painful losses in Countrywide stock, I am outraged at his manipulation of the system and this abuse of shareholders," wrote Moore, a trustee of a pension fund that holds about 500,000 shares of Countrywide stock worth about $9.6 million. "The timing of these sales and the changes to the trading plans raise serious questions about whether this is mere coincidence." Moore cited reports that Mozilo was unloading 4.9 million Countrywide shares worth more than $138 million between November 2006 and August 2007.

Moore said that at least three times over five months starting in October 2006 Mozilo reportedly changed the plans that outline how many of his shares would be sold monthly. That, said Moore, allowed the CEO to sell the stock before prices fell dramatically. Moore, a Democrat who is running for governor, said in a statement Thursday that Mozilo's sales had generated gains of about $4 million this week. "While Countrywide shareholders have faced massive losses, Mr. Mozilo has been stuffing his pockets," Moore said in the statement. "With Mr. Mozilo still in the CEO chair and with the deafening silence coming from Countrywide to its investors, the SEC needs to take a hard look at this situation."

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More market mayhem...

Stocks get slammed
October 15 2007: Financial sector leads decliners on Citigroup's weak profits, debt rescue fund implications; crude hits all-time high above $86 a barrel.

Stocks tanked Monday, with the Dow posting its biggest one-day loss in more than a month, after Citigroup's weak profit report and record-high oil prices sparked a big selloff. The Dow Jones industrial average lost around 108 points, suffering its biggest one-day point loss since Sept. 7, when it slumped nearly 250 points after a disappointing August jobs report. The S&P 500 index lost 0.8 percent. Both indexes hit all-time highs late last week.

The Nasdaq composite lost 0.9 percent. The tech-heavy index hit a fresh 6-1/2 year high last week. The Russell 2000 small-cap index gave up 1.4 percent. After falling to session lows in late afternoon, stocks managed to stabilize and shave off some losses going into the close.

Citigroup's weak profit report set the stage for early losses, raising questions about whether the worst of the credit market fallout is really over. Also adding to those concerns: news that Citi, JP Morgan and Bank of America are setting up a debt rescue fund - at the behest of the Treasury Department. Add to that spiking oil prices, and there were plenty of reason for a selloff, analysts said.

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