Mortgage crisis

Credit crisis expands, hitting all kinds of consumer loans

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WASHINGTON – The credit crisis triggered by bad home loans is spreading to other areas, forcing banks to tighten credit and probably extending the credit crisis that’s dragging down the economy well into next year, and perhaps beyond.

That means consumers are going to have an increasingly difficult time getting bank loans for car purchases, credit cards, home equity credit lines, student loans and even commercial real estate, experts say.

When financial analyst Meredith Whitney wrote in a report last October that the nation’s largest bank, Citigroup, lacked sufficient capital for the risks it had assumed, she was considered a heretic.

However, Whitney was proved correct: Citigroup pushed out its CEO, sought foreign investors and slashed its dividend. Her comments now carry added weight on Wall Street, and she has a new warning for ordinary Americans: The crisis in credit markets is far from over, and it increasingly will affect consumers.

“In fact, we believe that what lies ahead will be worse than what is behind us,” Whitney and colleagues at Oppenheimer & Co. wrote in a lengthy report last month about threats faced by big national banks, including Bank of America, Wachovia and others.

The warning is scary considering what’s already behind us in the credit crisis – the resignation or firing since last August of CEOs at almost every large commercial or investment bank; the Federal Reserve lowering its benchmark lending rate by 3.25 percentage points; a Fed-brokered deal to sell investment bank Bear Stearns; and weekly auctions of short-term loans from the Fed worth billions of dollars to keep credit markets functioning.

(Got Gold and Silver? – The Infinite Unknown)

Read moreCredit crisis expands, hitting all kinds of consumer loans

The Derivatives Market is Unwinding!

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Worldwide, it is $596 TRILLION dollars *. The derivatives market dwarfs the real market for goods and services, and acts likes an unregulated black market.
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A couple of months ago, a financial analyst who sells derivatives told me that fears about a meltdown in the derivatives market were unfounded.
Yesterday, he told me – with a very worried look – “THE DERIVATIVES MARKET IS UNWINDING!”

What does this mean? What are derivatives and why should you care if the market is unwinding?

Well, it turns out that the reason that Bear Stearns was about to go belly-up before JP Morgan bought it is that it had held trillions of dollars in derivatives, which were about to go south. (The reason that JP Morgan was so eager to buy Bear Stearns is that it was on the other side of these derivative contracts — if Bear Stearns had gone under, JP Morgan would have taken a huge hit. But the way the derivative agreements were drafted, a purchase by JP Morgan canceled the derivative contracts, so that JP Morgan didn’t experience huge losses. That is probably why the Fed was so eager to broker – and fund – the shotgun marriage. JP Morgan is a much larger player, and if Bear’s failure had caused the derivatives hit to JP Morgan, it probably would have rippled out to the whole financial system and potentially caused an instant depression).

In addition, the subprime prime loan crisis is intimately connected to the unwinding of the derivatives market. Specifically, loans were repackaged into derivatives called collateralized debt obligations (or “CDO’s”) and sold to both big and regional banks and investment companies worldwide. The CDO’s were highly-leveraged — many times the amount of the actual loans. When the subprime loan crisis hit, the high leverage magnified the fallout, and huge sums of CDO derivatives became essentially worthless.

Do you remember when wealthy Orange County, California, went bankrupt in 1994? Yup, that was because it had invested in bad derivatives.

And, according to a recent article by one of the world’s top derivative insiders, the market for credit default swap (“CDS”) derivatives is also unraveling.

And reported just today, Lehman Brothers is now on the edge, due to exposure to derivatives.

Derivatives are the Elephant in the Living Room

The subprime mortgage crisis is bad, and is hurting many people, and slowing the economy. High oil and food prices are bad, and are hurting many people, and bringing down the economy. But — according to top insiders — derivatives are the elephant in the room . . . the single largest threat to the U.S. and world economy.

One reason is that, according to Paul Volcker, the former chairman of the Federal Reserve, the entire modern financial system is based upon derivatives, and the financial system today is entirely different from the traditional American or global financial system because derivatives – a relatively new concept – now underly the entire fabric of the financial system. In short, many of the people who know the most about derivatives say that the current system is a house of cards built upon derivatives.

Moreover, as mentioned above, the subprime and derivatives crises are closely linked. Similarly, Britian’s New Statesman newspaper links derivatives and rising food and commodity prices:

Read moreThe Derivatives Market is Unwinding!

Banks’ credit crisis solutions have echoes of 1929 Depression

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As banks look to shore up their balance sheets in the wake of the credit squeeze, Philip Aldrick asks whether it is all short-term trickery


Investors gather in New York’s financial district after the stock market crash of 1929, which heralded the onset of the Great Depression

‘We are in the midst of the worst financial crisis since the 1930s,” warns the eminent financier George Soros in his latest book, The New Paradigm for Financial Markets. It’s a rather extreme view, but the man who broke the Bank of England is not alone in his dark funk. At a recent event, one banker laced Soros’s sentiment with a little gallows humour, ruefully predicting “10 years of depression followed by a world war”.

Comparisons with the great crash of 1929 are inevitable and the parallels manifold. Then it was an over-inflated stock market that burst before wider economic malaise ushered in the Great Depression.

This time, in the words of Intermediate Capital managing director Tom Attwood, sub-prime was merely “a catalyst” for the inevitable pricking of the credit market bubble as “disciplines were bypassed in favour of loan book growth at almost any cost”. Again the talk is of recession, certainly in the US and possibly in the UK.

Perhaps the most intriguing parallel, though, is the crude attempt at self-preservation made by the investment trusts in 1929 and the banks now.

In the great crash, investment trusts with vast cross-holdings in each other tried to stem their collapse by buying up their own stock in what the economist JK Galbraith in his book, The Great Crash 1929, described as an act of “fiscal self-immolation”. At the time, “support of the stock of one’s own company seemed a bold, imaginative and effective course,” Galbraith wrote, but ultimately the trusts were just “swindling themselves”.

Modern economists have compared the trusts’ actions with what the banks are now doing. “They seem to be just papering over the cracks,” says Brendan Brown, chief economist at Mitsubishi UFJ Securities.

Read moreBanks’ credit crisis solutions have echoes of 1929 Depression

US banks likely to fail as bad loans soar

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US banks set aside a record $37.1bn to cover losses on real estate loans and other credits during the first quarter in a sign of the growing economic pain being caused by the global credit crisis, regulators said on Thursday.

Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation, said it was likely loan-loss provisions and bank failures would rise in coming quarters as the fallout from market turmoil hits the real economy.

“While we may be past the worst of the turmoil in financial markets, we’re still in the early stages of the traditional credit crisis you typically see during an economic downturn,” she said, adding: “What we really need to focus on is the uncertainty surrounding the economy . . . and again it is all about housing.”

Ms Bair spoke as the FDIC released its quarterly banking profile, which showed loan-loss provisions in the first quarter were more than four times higher than last year’s level. That was the main reason bank earnings fell 46 per cent to $19.3bn from the first quarter in 2007 for the commercial banks and savings institutions where the FDIC insures customer deposits.

Following restatements by banks, the FDIC revised the industry’s net income for the fourth quarter of last year from $5.8bn to $646m – the lowest since the end of 1990.

Meanwhile, the FDIC said the number of “problem” banks rose in the first quarter from 76 to 90, with combined assets of $26.3bn. Three US banks have failed this year, compared with three for the whole of last year and none in 2005 and 2006.

Ms Bair said she expected more bank failures but emphasised that the number of problem institutions remained well below the record levels of the savings and loan crisis of the 1980s and 1990s – when one in 10 banks were in that category.

However, she said one worrying trend was the declining “coverage ratio”, which compares bank reserves with the level of loans that are 90 days past due. This ratio fell for the eighth consecutive quarter, to 89 cents in reserves for every $1 of noncurrent loans, the lowest level since the first quarter of 1993.

“This is the kind of thing that gives regulators heartburn,” said Ms Bair. “We also want them to beef up their capital cushions beyond regulatory minimums given uncertainty about the housing markets and the economy . . . It’s only prudent to be building up capital at a time like this.”

In a sign that some US banks may have underestimated the cost of the housing slump, KeyCorp this week doubled its forecast for loan losses – its second revision in as many months – sending its share price tumbling by more than 10 per cent. During the property boom, KeyCorp expanded in fast-growing regions such as southern California and Florida, where problem loans are now growing.

By Joanna Chung and Saskia Scholtes in New York
Published: May 29 2008 20:43 | Last updated: May 29 2008 20:43

Source: Financial Times

Home prices fell at record pace in first quarter: S&P

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NEW YORK (Reuters) – Prices of single-family homes plunged a record 14.1 percent in the first quarter from a year earlier, marking a pace five times faster than the last housing recession, according to the Standard & Poor’s/Case Shiller national home price index reported on Tuesday.

The S&P/Case Shiller composite index of 20 metropolitan areas fell 2.2 percent in March from February and plummeted a record 14.4 percent from March 2007.

Economists expected prices for the 20-city index to fall 2.0 percent on month and 14.0 percent from a year earlier, according to the median forecast in a Reuters survey.

“There are very few silver linings that one can see in the data,” David Blitzer, chairman of S&P’s index committee, said in a statement.

Falling home prices have become the scourge of the housing market that is seeing its worst downturn since the 1930s. Home values since last year have been dropping below balances owed on many mortgages, leaving borrowers with no equity and more likely to succumb to foreclosure.

The crisis in foreclosures, which pressure prices even lower, has spurred numerous plans by regulators and lawmakers that aim to keep borrowers in their homes by forgiving a portion of their loan’s principle.

Housing markets that grew the most during the housing boom, such as Las Vegas, Nevada and Miami, Florida, are leading the decline, S&P said.

S&P said its composite index of 10 metropolitan areas declined 2.4 percent in March, for a record 15.3 percent year-over-year drop.

(Reporting by Al Yoon, Editing by Chizu Nomiyama)

Tue May 27, 2008 11:09am EDT

Source: Reuters

Federal regulators close Arkansas bank ANB Financial

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BENTONVILLE, Ark. (AP) — Federal regulators says they’ve closed ANB Financial National Association banks after discovering “unsafe and unsound” business practices there.

David Barr, a spokesman for the Federal Deposit Insurance Corp. says many customers served by the bank’s nine locations had accounts under $100,000, which will be fully insured by the government. Barr says customers can continue to write checks and draw money from ATMs through the weekend.

Barr says Pulaski Bank and Trust Co. agreed to assume control over ANB Financial’s bank locations, which will be open Monday.

As of Jan. 31, federal regulators say ANB Financial had about $2.1 billion in assets and $1.8 billion in total deposits.

It was the third closure this year of an FDIC-insured bank. Douglass National Bank, a Missouri bank with $58.5 million in assets, was shut in January; another Missouri institution with assets of $18.7 million, Hume Bank, was shut down in March.

Both were dwarfed in size of ANB Financial, where regulators found lax lending standards, mostly for construction and development loans for projects in Utah, Idaho and Wyoming, as well as Arkansas.

Observers have been watching for signs of bank distress resulting from the mortgage crisis. Profits at federally insured U.S. banks and thrifts plunged to a 16-year low in the fourth quarter as institutions set aside a record-high amount to cover losses from sour mortgages.

The FDIC is planning to beef up its staff, including temporarily hiring up to 25 retired FDIC employees who worked in the agency’s more than 200-person division that handles failed banks. They will handle an anticipated increase in bank failures.

The Associated Press
May 9, 2008

Source: BusinessWeek

IMF: mortgage crisis may cost $945bn worldwide

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The International Monetary Fund released its semiannual Global Financial Stability Report, predicting that the economic crisis “is spreading beyond the US subprime market.” The report comes ahead of the IMF and World Bank spring meetings.

The International Monetary Fund said Tuesday the worldwide losses stemming from the US subprime mortgage crisis could hit 945 billion dollars as the impact spreads in the global economy.

Read moreIMF: mortgage crisis may cost $945bn worldwide

81% of Americans think country on ‘wrong track’

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WASHINGTON – FOUR out of five Americans believe things are ‘on the wrong track’ in the United States, the gloomiest outlook in about 20 years, according to a New York Times/CBS News poll.

The poll, released on Thursday, found that 81 per cent of respondents felt ‘things have pretty seriously gotten off on the wrong track’. That was up from 69 per cent last year and 35 per cent in early 2003.

Only 4 per cent of survey respondents said the country was better off than it was five years ago, while 78 per cent said it was worse, the newspaper said.

Read more81% of Americans think country on ‘wrong track’