Submitted by Naomi M on Wed, 11/07/2007 - 15:44.
Subprime meltdown equals credit crunch equals huge losses for big companies
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Merrill Lynch could face as much as $10 billion in additional write-downs on collateralized debt obligations, subprime-mortgage bonds and the like, according to Deutsche Bank's Mike Mayo. That's on top of the $8.4 billion that helped trigger the ouster of former Chief Executive Stan O'Neal.
Last Thursday’s stock market plunge drove Merrill Lynch stock down by 7.9 percent after the Wall Street Journal reported that the company may have engaged in questionable transactions with hedge funds in an effort to conceal its exposure to plummeting high-risk mortgage-backed securities. Citigroup Inc. - Citigroup Inc., the biggest U.S. bank by assets recently said that subprime mortgages and related securities lost as much as $11 billion of their value in the past month, a decline that may wipe out half of the company's profit so far this year.
Citigroup stock declined $1.23, or 3.3 percent, to $36.50 at 9:59 a.m. in composite trading on the New York Stock Exchange, and credit default swaps on the bank rose 8 basis points to a record 80 basis points. The contracts, which rise as perceptions of credit quality worsen, were as low as 10 basis points in June.
The company's credit rating was cut today by Fitch Ratings because of the writedowns and Standard & Poor's said the bank's AA long-term rating may be reduced.
Other financial stocks continued to record major losses
The four financial companies in the Dow Jones index—American Express, AIG, Citigroup and JP Morgan Chase—accounted for 27.7 percent of the drop in the index.
All 24 members of the KBW Bank Index fell, the worst day for the financial index in more than five years.
Credit Suisse reported a 31 percent drop in third-quarter net profit and a write-off of $1.9 billion in mortgage-linked and leveraged loan assets.
GMAC Financial Services said its third-quarter loss widened to $1.6 billion from $173 million a year earlier on losses in its real estate finance business.
Investment bank Bear Stearns declined by 5 percent. Morgan Stanley lost 5.6 percent.
Lehman Brothers declined 0.6 percent and
Goldman Sachs lost 4.4 percent.
Fed’s move may not be enough
The massive sell-off occurred despite the announcement by the Fed that it had lent $41 billion to money-market dealers, the largest infusion of capital into the market by the Fed since the credit crisis erupted in early August.
The enormous volatility on the stock market demonstrates that the credit crunch which developed last summer has not been resolved by two successive interest rate cuts—a half-point cut on September 18 and Wednesday’s quarter-point reduction. On the contrary, the underlying deflation of the credit bubble of the past several years, fueled largely by manic real estate speculation and a spree of leveraged buyouts, is far from having run its course, raising the specter of a prolonged tightening of credit and resulting slump in the broader economy.
Housing and subprime crises are getting worse
The percentage of subprime mortgages that were more than 60 days behind in their mortgage payments topped 20 percent in August, up from 18.7 percent in July and 17.1 percent in June, according to the latest data from First American LoanPerformance. Home prices were down more than 4 percent in the month of August from a year ago, as measured by the S&P/Case-Shiller Index.
“Mortgages are still deteriorating at an accelerating pace, and that’s scary,” aid Karen Weaver, global head of securitization research at Deutsche Bank. “We haven’t come near a stabilization, and we expect things to get worse as the bulk of resets” of interest rates on adjustable-rate mortgages “have yet to come.”
An article in Friday’s Wall Street Journal provides an indication of the potential financial toll from the housing collapse. It cites Mark Zandi, an economist at Moody’s Economy.com, as estimating that “of the $2.45 trillion in especially risky mortgages currently outstanding—including subprime mortgages, interest-only mortgages and others—as much as a quarter could suffer defaults in the months ahead. Total losses in these mortgages, he estimates, could reach $225 billion.”
The article goes on to say that Zandi puts the fall in home values at 10 percent by the end of 2008. “That would wipe out more than $3 trillion in home values,” it says.
No one was minding the store; too busy making money One way to understand the growing financial crisis is to realize that the ultimate collateral for much of the exotic credit securities from which Wall Street speculators made billions upon billions was the market price of homes and other real estate, whose rapid rise was fueled by the very debt bubble supposedly underpinned by home values.
The fact is, no one, including the banks and investment houses, knew the actual value of the assets underlying the CDOs, SIVs, derivatives and other forms of financial manipulation that are now coming crashing down.
As the New York Times financial reporter Floyd Norris put it on Friday: “No one seemed to be bothered by the lack of public information on just what was in some of these products. If Moody’s, Standard & Poor’s or Fitch said a weird security deserved an AAA [rating], that was enough.
Sources: http://www.bloomberg.com/apps/news?pid=20601087&sid= aMAGxngjADMs&refer=home http://www.wsws.org/articles/2007/nov2007/wall-n03.shtml 2007-10-05
Last Thursday’s stock market plunge drove Merrill Lynch stock down by 7.9 percent after the Wall Street Journal reported that the company may have engaged in questionable transactions with hedge funds in an effort to conceal its exposure to plummeting high-risk mortgage-backed securities. Citigroup Inc. - Citigroup Inc., the biggest U.S. bank by assets recently said that subprime mortgages and related securities lost as much as $11 billion of their value in the past month, a decline that may wipe out half of the company's profit so far this year.
Citigroup stock declined $1.23, or 3.3 percent, to $36.50 at 9:59 a.m. in composite trading on the New York Stock Exchange, and credit default swaps on the bank rose 8 basis points to a record 80 basis points. The contracts, which rise as perceptions of credit quality worsen, were as low as 10 basis points in June.
The company's credit rating was cut today by Fitch Ratings because of the writedowns and Standard & Poor's said the bank's AA long-term rating may be reduced.
Other financial stocks continued to record major losses
The four financial companies in the Dow Jones index—American Express, AIG, Citigroup and JP Morgan Chase—accounted for 27.7 percent of the drop in the index.
All 24 members of the KBW Bank Index fell, the worst day for the financial index in more than five years.
Credit Suisse reported a 31 percent drop in third-quarter net profit and a write-off of $1.9 billion in mortgage-linked and leveraged loan assets.
GMAC Financial Services said its third-quarter loss widened to $1.6 billion from $173 million a year earlier on losses in its real estate finance business.
Investment bank Bear Stearns declined by 5 percent. Morgan Stanley lost 5.6 percent.
Lehman Brothers declined 0.6 percent and
Goldman Sachs lost 4.4 percent.
Fed’s move may not be enough
The massive sell-off occurred despite the announcement by the Fed that it had lent $41 billion to money-market dealers, the largest infusion of capital into the market by the Fed since the credit crisis erupted in early August.
The enormous volatility on the stock market demonstrates that the credit crunch which developed last summer has not been resolved by two successive interest rate cuts—a half-point cut on September 18 and Wednesday’s quarter-point reduction. On the contrary, the underlying deflation of the credit bubble of the past several years, fueled largely by manic real estate speculation and a spree of leveraged buyouts, is far from having run its course, raising the specter of a prolonged tightening of credit and resulting slump in the broader economy.
Housing and subprime crises are getting worse
The percentage of subprime mortgages that were more than 60 days behind in their mortgage payments topped 20 percent in August, up from 18.7 percent in July and 17.1 percent in June, according to the latest data from First American LoanPerformance. Home prices were down more than 4 percent in the month of August from a year ago, as measured by the S&P/Case-Shiller Index.
“Mortgages are still deteriorating at an accelerating pace, and that’s scary,” aid Karen Weaver, global head of securitization research at Deutsche Bank. “We haven’t come near a stabilization, and we expect things to get worse as the bulk of resets” of interest rates on adjustable-rate mortgages “have yet to come.”
An article in Friday’s Wall Street Journal provides an indication of the potential financial toll from the housing collapse. It cites Mark Zandi, an economist at Moody’s Economy.com, as estimating that “of the $2.45 trillion in especially risky mortgages currently outstanding—including subprime mortgages, interest-only mortgages and others—as much as a quarter could suffer defaults in the months ahead. Total losses in these mortgages, he estimates, could reach $225 billion.”
The article goes on to say that Zandi puts the fall in home values at 10 percent by the end of 2008. “That would wipe out more than $3 trillion in home values,” it says.
No one was minding the store; too busy making money One way to understand the growing financial crisis is to realize that the ultimate collateral for much of the exotic credit securities from which Wall Street speculators made billions upon billions was the market price of homes and other real estate, whose rapid rise was fueled by the very debt bubble supposedly underpinned by home values.
The fact is, no one, including the banks and investment houses, knew the actual value of the assets underlying the CDOs, SIVs, derivatives and other forms of financial manipulation that are now coming crashing down.
As the New York Times financial reporter Floyd Norris put it on Friday: “No one seemed to be bothered by the lack of public information on just what was in some of these products. If Moody’s, Standard & Poor’s or Fitch said a weird security deserved an AAA [rating], that was enough.
Sources: http://www.bloomberg.com/apps/news?pid=20601087&sid= aMAGxngjADMs&refer=home http://www.wsws.org/articles/2007/nov2007/wall-n03.shtml 2007-10-05
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