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

[waltky]

Hunker down for a long recovery...

Credit crisis: Long road to recovery
December 4 2007: It's six months into the credit crunch and investors are still shaken. Businesses and households should get ready to hunker down in '08.

A new year, a new start. For the credit markets, that's wishful thinking. Nearly six months since the credit crunch started, the situation is still grim - and there are few encouraging signs, which doesn't bode well for businesses and households next year. Toxic debt keeps cropping up on bank balance sheets. The housing slump still hasn't found a bottom, and investors remain skittish. Market watchers expect the credit environment to remain challenging into the better part of 2008. That will take a toll on corporate profits and squeeze American consumers, not to mention put a drag on economic growth.

"We're pretty close to a point where the capital markets fail to function properly," said John Addeo, a high-yield fund manager at MFS Investments. "I believe the Fed has the ability and wherewithal to resolve that issue, but what we really need to see is a restoration of confidence in the financial system." When the mortgage mess triggered a wave of turmoil in the summer, investors had hoped problems would remain relatively contained. Instead, they've seeped into all pockets of the debt market. The culprit has been the loads of complex debt instruments tied to home loans given to borrowers with poor credit. From collateralized debt obligations (CDOs) to structured investment vehicles (SIVs), this alphabet soup of products has wreaked havoc on financial markets.

Financial firms have taken staggering writedowns, costing the CEOs at Citigroup and Merrill Lynch their jobs. The heavy losses, which are expected to continue into next year, have also forced banks to tighten their lending. To be sure, pressure has eased in some parts of the debt market. The backlog of financing for corporate buyouts, for instance, has been reduced to about $200 billion from $300 billion right before Labor Day. That's an improvement but still a substantial amount of debt for the market to wade through.

MORE

See also:

Roadblock to a subprime solution
December 4 2007: The biggest obstacle to a mortgage bailout plan could be the investors who wound up with the bad debt.

A sweeping solution to the subprime lending crisis could get snagged by a big sticking point at the end of the mortgage chain. On Monday, Treasury Secretary Henry Paulson said in a speech that its Hope Now coalition of government, industry and community groups is developing a streamlined way to move able homeowners into sustainable mortgages.

A large part of that plan, it's been widely reported, is to broadly rework adjustable rate mortgages (ARMs) for all borrowers who qualify and freeze their interest rates before they jump to unaffordable levels. But investors in mortgage-backed securities, who buy the loans wholesale from lenders, aren't exactly jumping on board.

"You have contracts in place guaranteeing investors a fixed rate of returns," said Jim Carr, Chief Operating Officer of the non-profit advocacy group, National Community Reinvestment Coalition. "They have no immediate incentive to give up those returns."

MORE

[waltky]

Subprime shenanigans...

Wary of Risk, Bankers Sold Shaky Debt
December 6, 2007 - As the subprime loan crisis deepens, Wall Street firms are increasingly coming under scrutiny for their role in selling risky mortgage-related securities to investors.

Many of the home loans tied to these investments quickly defaulted, resulting in billions of dollars of losses for investors. At the same time, many of the companies that sold these securities, concerned about a looming meltdown in the housing market, protected themselves from losses. One big bank that saw the trouble coming, Goldman Sachs, began reducing its inventory of mortgages and mortgage securities late last year. Even so, Goldman went on to package and sell more than $6 billion of new securities backed by subprime mortgages during the first nine months of this year.

Of the loans backing the Goldman deals for which data is available, nearly 15 percent are already delinquent by more than 60 days, are in foreclosure or have resulted in the repossession of a home, according to data compiled by Bloomberg. The average default rate for subprime loans packaged in 2007 is 11 percent. “There is a maxim that comes to mind: ‘If you work in the kitchen, you don’t eat the food,’” said Josh Rosner, a managing director of Graham Fisher, an independent consulting firm in New York.

The New York attorney general, Andrew M. Cuomo, has subpoenaed major Wall Street banks, including Deutsche Bank, Merrill Lynch and Morgan Stanley, seeking information about the packaging and selling of subprime mortgages. And the Securities and Exchange Commission is examining how Wall Street companies valued their own holdings of these complex investments. The Wall Street banks that foresaw problems say they hedged their mortgage positions as part of their fiduciary duty to shareholders. Indeed, some other companies, particularly Citigroup, Merrill Lynch and UBS, apparently did not foresee the housing market collapse and lost billions of dollars, leading to forced resignations of their chief executives.

In any case, the bankers argue, buyers of such securities — institutional investors like pension funds, banks and hedge funds — are sophisticated and understand the risks. Wall Street officials maintain that the system worked as it was supposed to. Underwriters, they say, did not pressure colleagues on trading desks or in research departments to promote securities blindly.

MORE

[waltky]

The other shoe is about to fall, what happens on Wall St. usually trickles down to Main St.

Dark clouds gather on Wall Street
December 7 2007: The nation's brokerages kick off the earnings season next week. Analysts are betting that there will be plenty of bad news to go around.

When the nation's biggest brokerage firms reported disappointing quarterly earnings in October, many on Wall Street were hoping that the darkest days of the credit crisis were behind them. Now, with less than a week before the start of the next earnings season, analysts and investors are betting that this quarter's results could be just as bleak.

"I expect the numbers to be terrible," said Matt Kelmon, president and portfolio manager at the Kelmoore Strategy Funds, whose firm owns shares of a number of Wall Street firms. Since the last quarter, few encouraging signs have emerged about the health of brokerage firms. Meanwhile, stock investors have remained on edge, the credit markets frozen shut and the nation's economic picture uncertain.

As a result, Wall Street analysts have been slashing their earnings estimates on firms like Morgan Stanley (Charts, Fortune 500) and Bear Stearns (Charts, Fortune 500), both of which are expected to post steep losses in December after warning last month they would take multi-billion dollar writedowns this quarter. As of midday Friday, neither firm had said when it would release its fourth-quarter report.

MORE

[waltky]

The day of reckoning is upon us...

Wall Street to Fed: Not good enough
December 11 2007: Stocks tank after the Fed cuts rates by a quarter-percentage point, rather than the half some had hoped. Dour comments on the economy factor in too.

Stocks slumped and bonds rallied Tuesday after the Federal Reserve cut the fed funds rate by a quarter-percentage point, as expected, but disappointed some investors looking for a bigger cut. The Dow Jones industrial average lost 294 points, or 2.1 percent. It was the blue-chip indicator's seventh worst day of the year in terms of both the point and percentage loss.

The broader S&P 500 index lost 2.5 percent. The tech-fueled Nasdaq composite lost almost 2.5 percent. The Russell 2000 small-cap index fell 3.1 percent. "The stock market was looking for a bigger cut and so there's some disappointment," said Georges Yared, chief investment strategist at Yared Investment Research.

The selling was also influenced by the recent rally on Wall Street, which had left the Dow and S&P 500 within reach of the record highs hit in October. "The market has gone up in recent weeks on expectations that the Fed would cut, so you're seeing a 'buy the rumor, sell the news' reaction," said Alan Skrainka, chief market strategist at Edward Jones.

Fed cuts rates by a quarter point

[waltky]

Oh, now he's got it all figured out...

Greenspan: Global growth spurred credit crisis
Wed., Dec. 12, 2007 - Former Fed chief says subprime loans were an "accident waiting to happen"

The U.S. subprime mortgage crisis was an "accident waiting to happen" as a period of unprecedented global growth seduced investors into underpricing risk, former Federal Reserve Chairman Alan Greenspan argued in an article published by The Wall Street Journal on Wednesday. While acknowledging the low U.S. interest rates set under his leadership may have contributed to the bubble in U.S. home prices, Greenspan said he felt the roots of the subprime mortgage crisis actually lie with global economic expansion.

"The root of the current crisis, as I see it, lies back in the aftermath of the Cold War, when...market capitalism quietly, but rapidly, displaced much of the discredited central planning that was so prevalent in the Third World," Greenspan wrote. The growth of fairly educated low-cost workers, and exports from developing countries flattened wages in developed countries and reduced inflation expectations globally, including inflation expectations embedded in global long-term interest rates, Greenspan said.

"In retrospect, global economic forces, which have been building for decades, appear to have gained effective control of the pricing of longer debt maturities," Greenspan wrote in the Journal. "Simple correlations between short- and long-term interest rates in the U.S. remain significant, but have been declining for over a half-century. Asset prices more generally are gradually being decoupled from short-term interest rates."

More Greenspan: Global growth spurred credit crisis - Stocks & economy - MSNBC.com

See also:

Fed teams with central banks on credit crisis
WASHINGTON - U.S. central bank plans to offer banks $40 billion in emergency funds

The Federal Reserve on Wednesday announced a novel approach to injecting money into the banking system as it struggles to combat a severe credit crunch that threatens to drag the country into a recession. The announcement helped dispel the sour mood on Wall Street, where investors had pushed the Dow Jones industrial average down by 294 points on Tuesday out of disappointment with what was seen as a timid interest rate cut. After Wednesday’s announcement, stocks recouped a part of the previous day’s losses, but had lately given up their gains.

The Fed said it would conduct two auctions next week where banks can bid for up to $40 billion in loans, money that they will have to bolster their own reserves. It marked the Fed’s biggest concentrated effort to inject liquidity into the banking system since the Sept. 11, 2001, terrorist attacks. The hope is that the extra funds will spur increased lending on the part of the banks and combat a serious credit crunch that has made loans harder to obtain for many businesses and consumers.

In afternoon trading, the Dow Jones industrial average was up more than 80 points. The Fed linked the new auction process to an announcement that it was extending a line of credit in dollars to the European Central Bank and the national bank of Switzerland so that those institutions could better deal with credit problems in Europe. The Fed said it was also coordinating with the central banks of England and Canada.

More Fed teams with central banks on credit crisis - Stocks & economy - MSNBC.com

[waltky]

Senate joins the battle to keep the economy together...

Senate Moves to Ease Mortgage Woes
Friday, December 14, 2007 (WASHINGTON) — The Senate moved Friday against the worsening mortgage crisis, voting to make it easier for thousands of homeowners with ballooning interest rates to refinance into federally insured loans.

The legislation, approved 93-1, would allow the Federal Housing Administration to back refinanced loans for borrowers who are delinquent on payments because their mortgages are resetting to sharply higher rates from low initial "teaser" levels. The bill also tries to make FHA loans more attractive than risky subprime loans by accepting lower down payments and expanding the eligibility for counseling for homeowners having difficult with their mortgage payments.

An estimated 2 million to 2.5 million adjustable-rate mortgages are scheduled to reset in the next year, jumping to much steeper rates that could cost borrowers their homes. The wave could crest during the presidential and congressional election campaigns next year, and politicians have been wrestling with what the government's response should be. The Senate's proposed changes are especially important now, given the credit crisis that has made it much more difficult and more expensive for people to refinance or get financing to buy a home. Private lenders have been reluctant to make new loans.

Allowing the federal government to insure more and bigger loans should help provide some relief and ease the credit crunch. The Senate's plan would give homeowners "the option of refinancing to an FHA-backed loan with the peace of mind that comes with it," said Senate Majority Leader Harry Reid, D-Nev. "And for future homebuyers, a fully backed FHA loan with honest, upfront terms, will help prevent crises like we now face."

MORE

See also:

Fannie: Home prices to sink 4-5% in '08
December 14 2007: Fannie Mae chief executive tells shareholders he sees no recovery in housing before 2009 - blames unaffordable prices for current housing woes.

Average home prices will decline another 4 to 5 percent in 2008, according to Fannie Mae Chief Executive Dan Mudd. Mudd, speaking at Fannie Mae's first shareholders meeting in more than three years, said the mortgage-finance firm does not see a turnaround in the U.S. housing market until 2009 "at the earliest." "Home sales are down, we expect more to come," Mudd said.

The median price of an existing home sold jumped 43 percent between 2001 and 2005, but year-over-year price declines started in late 2006 and are expected to fall almost 2 percent this year, according to the National Association of Realtors. That would mark the first year with a decline in prices. The run-up in prices caused a problem with affordability in many markets, Mudd said, and prices need to retreat in order to restore affordability before a housing recovery can begin.

He blamed the growth in subprime mortgages that sparked the current credit market crisis on the affordability problems during the boom years. "With the decrease of affordability, a lot of those products grew up to get payments down," he said. But he said that once home prices become more affordable, he expects the market to recover relatively quickly. "There's a strong fundamental supply and demand under the market," he said.

MORE

[waltky]

More good money after bad...

$20bn from Fed to ease credit woe
Monday, 17 December 2007, The US Federal Reserve has made $20bn (£9.9bn) available to major banks in an attempt to ease concerns about a global credit crunch.

Monday's auction is the first step in a plan agreed among five central banks, including the Bank of England and the European Central Bank.

The central banks hope that the auction will make retail banks and investment houses happier to lend to each other. Such lending has become more expensive recently, adding to the credit squeeze.

The central banks plan to offer more than $100bn in loans to retail banks, after it became clear that cuts in interest rates were not having an effect on inter-bank lending.

US Treasury Secretary Henry Paulson said on Monday that there was no "silver bullet" to solve the credit market problems.

Risk control

[waltky]

Morgan Stanley's hit bigger than first thought...

Morgan Stanley takes $9.4bn hit
Wednesday, 19 December 2007, The bank has been hit by the sub-prime crisis

Morgan Stanley has revealed a bigger-than-expected write-down of assets and sold a $5bn (£2.5bn) stake to a Chinese sovereign wealth fund. The US investment bank said that it had been forced to write down $9.4bn for the three months to 30 November. The bank said last month that it would be taking a charge of $3.7bn.

Morgan Stanley said that the injection from China Investment Corp - which equates to 9.9% of the bank - would help it to replenish its capital. China's willingness to invest in Morgan Stanley was seen as a vote of confidence on Wall Street and the firm's shares rose 4% in Wednesday trading. But the heavy losses will increase pressure on chief executive John Mack, who described the performance as "deeply disappointing" and said he would not accept a bonus for 2007.

The woes in the sector have already seen the firm's highest ranked woman, Zoe Cruz, leave the firm. Other banks have also been hit, and Merrill Lynch's boss Stan O'Neal and Citigroup's chief executive Charles Prince have both left their posts recently. "Huge write-downs caused the ouster of Stan O'Neal and Charles Prince," speculated Peter Cardillo, a market analyst at Avalon Partners. "Maybe Morgan Stanley will follow them."

Sovereign investment

See also:

Morgan Stanley CEO skipping year-end bonus
Wed., Dec. 19, 2007 - John Mack passes on holiday money due to huge 4Q writedowns

"Deeply disappointing" fourth-quarter writedowns have Morgan Stanley Chief Executive John Mack bypassing his year-end bonus — and he is unlikely to be the only Wall Street CEO giving up tens of millions of dollars in holiday money. Morgan Stanley said it was forced to take $9.4 billion in writedowns during its fourth fiscal quarter, which ended Nov. 30, because of bad bets on securities backed by mortgages.

"Ultimately, accountability for our results rests with me, and I believe in pay for performance, so I've told our compensation committee that I will not accept a bonus for 2007," Mack said in a statement. Mack received a stock and option bonus in 2006 that, at the time of the award, was worth $40 million.

Top executives at Bear Stearns Cos., including Chief Executive James Cayne, may forego year-end bonuses as well, according to a report in the Wall Street Journal Wednesday. Bear Stearns will report its results for the quarter Thursday morning. Like Morgan Stanley, Bear Stearns is expected to report losses and billions of dollars in writedowns for its fiscal fourth quarter.

More Morgan Stanley CEO skipping year-end bonus - U.S. business - MSNBC.com

[waltky]

Effect of the Bhutto assassination on stock markets here...

Terror, economy sink stocks
December 27 2007: Major indexes plummet after Bhutto's assassination stokes geopolitical concerns and economic reports show weakness in domestic markets.

Stocks tanked Thursday, after gaining some momentum earlier in the week, as political turmoil in Pakistan turned deadly and downbeat economic reports took the wind out of Wall Street's sails. The Dow Jones industrial average (INDU) fell nearly 1.4 percent. The broader S&P 500 (SPX.X) index shed nearly 1.3 percent. The tech-laden Nasdaq (COMPX) lost 1.7 percent. Treasury prices were higher. The dollar fell against the euro and the yen. Oil and gold prices rose.

Wall Street had seen signs of recovery earlier in the week, rallying in a shortened session on Monday, then ending slightly higher in Wednesday's session. But Thursday's session was hit with bad news early on and could not shake the negative sentiment. Former Pakistani Prime Minister Benazir Bhutto was assassinated Thursday in a suicide attack in Rawalpindi, Pakistan. Investors worry that Bhutto's assassination will cause further political strife in Pakistan, a country with nuclear capabilities, and upset world markets.

Markets were also shaken by a number of economic reports released early Thursday highlighting concerns about the strength of the economy. "The assassination of Benazir Bhutto got the market off on a bad foot and now we're seeing a lot of selling on the negative economic news," said Fred Dickson, chief market strategist at D.A. Davidson & Co.

MORE

See also:

Citi may face $19 billion writedown - Analyst
December 27 2007: Goldman Sachs analysts said the bank might have to cut dividend 40% to preserve capital.

When Citigroup warned in early November that it was likely to write down its portfolio by $8 billion to $11 billion in the fourth quarter because of exposure to bad loans, investors recoiled at the size of the losses. Some now say those early estimates appear drastically understated. Citigroup could write off as much as $18.7 billion in the fourth quarter, wrote Goldman analysts William F. Tanona, Betsy Miller and Neil C. Sanyal in a note to investors late Wednesday. If it does, they say, the bank may be forced to lower its dividend by 40 percent.

Citi has about $55 billion in exposure to subprime mortgages, about $43 billion of which are collateralized debt obligations, or CDOs, that have mortgages underlying them. "We still believe it will be a couple of quarters before the current credit crisis is fully digested by the markets," the Goldman analysts wrote. Already, Citi has been propped up by a $7.5 billion investment from the Abu Dhabi Investment Authority, a sovereign wealth fund that in late November bought a 4.9 percent stake in the bank.

But if Citi must write down the value of its portfolio by more than it estimated back in early November - a distinct possibility, given the lack of improvement in the tight credit markets - Goldman analysts said the bank may need to raise an additional $5 billion to $10 billion in cash. When Citi said Nov. 4 that its writedown could be between $8 billion to $11 billion, it acknowledged the value could end up being larger. City says it will not revise its estimate throughout the fourth quarter as credit conditions changed.

MORE

[waltky]

Time for a Recession? Cause for Concern...

Stocks Fall After Weak Jobs Reading
Jan 4, 2008 : Stocks Fall After Slower-Than-Expected Jobs Growth, Rising Unemployment

Wall Street plunged again Friday after the government's much-anticipated employment report showed weaker-than-expected job growth and a rise in the unemployment rate. The Nasdaq composite index, also pummeled by a downgrade of Intel Corp., skidded more than 3 percent, while the Dow Jones industrials fell more than 1.5 percent.

The Labor Department's report that employers raised payrolls by only 18,000 and that the nation's unemployment rate rose to its highest level since November 2005 unnerved investors, who worried that a weakening job market will hurt consumer spending. A better-than-expected economic reading on the nation's service sector briefly pulled stocks off their lows but wasn't enough to shake investors' concerns.

Investors had been awaiting the jobs report for weeks as they tried to determine whether the economy would continue to benefit from robust consumer spending even as sectors like home construction, mortgage writing and manufacturing slow. Wall Street is concerned that areas of weakness could puncture growth and even tip the economy into recession if consumers can't depend on a solid job market.

MORE

See also:

How Bush may boost the economy
January 4 2008: Any short-term push to stave off a recession could face political and budgetary challenges.

Word is that President Bush may propose new measures to boost the economy by the time he gives his State of the Union address later this month. While he has steadfastly maintained that the economy is fundamentally strong, the fact that the president is considering a so-called fiscal stimulus package is an indication that the Administration is getting worried.

Such a package would aim to ward off a recession, the fear of which has grown stronger in the wake of discouraging data on jobs, rising energy prices and a slowing housing market.

There is also an indication that leading Democrats might be working on a plan of their own. A spokesman for Senate Finance Committee Chairman Max Baucus (D-Mont.) said in an e-mail to CNNMoney.com that Sen. Baucus "already has ideas of his own about the possible need for an economic stimulus package this year and is planning for the Finance Committee to discuss very early in the session what shape such a package might take."

Tax cuts on the table