Greenspan Says Credit Crisis Is Worst in 50 Years

Former Federal Reserve Chairman Alan Greenspan said the current credit crisis is the worst in at least 50 years.

The current credit crisis is the most wrenching in the last half century and possibly more, Greenspan told a conference in Tokyo today via satellite from Washington.

Greenspan's remarks echo the assessments of economists including those at the International Monetary Fund, and may add to pressure on policy makers to strengthen their response to the credit crunch. Federal Reserve officials last week acknowledged that capital markets remain distressed even after the fastest interest-rate cuts in two decades.

Greenspan, 82, said the extent of damage stemming from the collapse of the subprime-mortgage market won't be known for months.

Have we reached a point where prices are stable? We cannot know that for a couple of months, he said. He added that prices may begin to stabilize by the start of 2009 as home inventories decline.

The yield on the 10-year note fell 1 basis point to 3.53 percent as of 10:07 a.m. in Tokyo, according to bond broker Cantor Fitzgerald LP.

Greenspan said inflation will be contained during the current slowdown before picking up as the world economy recovers momentum.

Economic Slack

It's difficult to imagine any major breakout of inflation as economic slack continues to increase, he said. What we will see is gradually rising inflationary pressures that will probably be subdued during the current period of slack, but that will surely reemerge when economies pick up.

Dollar Declines to 12-Year Low Against Yen on Credit Losses

The dollar fell to a 12-year low against the yen on speculation more banks will report credit- market losses after JPMorgan Chase & Co. and the New York Federal Reserve bailed out Bear Stearns Cos.

The U.S. currency also traded near a record low against the euro as traders speculated the Fed will slash interest rates one percentage point this week to avert a recession. The dollar set record lows against the euro the past four days as investor confidence tumbled, sending U.S. stocks lower for a third straight week and driving gold to a record high of $1,009 an ounce.

The U.S. dollar will remain under pressure, Benedikt Germanier and Alina Anishchanka, strategists at UBS AG, the world's second-biggest foreign-exchange trader wrote in a March 14 week-ahead report. Easing monetary policy, ongoing uncertainties in the financial sector and rising fears of capital outflows are chief reasons for our short-term bearish outlook.

The dollar sank to as low as 99.08 yen in Wellington after reaching 98.90 yen on March 14, the lowest since September 1995. It lost 3.5 percent last week, the most since November.

The U.S. currency traded at $1.5677, after reaching $1.5652, the weakest since the European currency's 1999 debut. It fell 2 percent last week, its fifth straight decline, the longest slide since November.

The dollar has lost about 16 percent against the euro and 15 percent versus the yen in the past year as the worst housing slump since 1991 forced the Fed to cut its benchmark rate 2.25 percentage points to bolster the economy, lowering returns on dollar deposits.

Bear Bailout

The New York Fed agreed to provide financing through JPMorgan for up to 28 days after Bear Stearns said its liquidity position had significantly deteriorated. Bear Stearns shares fell 47 percent in New York trading.

The likelihood the Fed will cut its target by one percentage point to 2 percent at the March 18 meeting rose to 54 percent yesterday, from 6 percent a week earlier, futures on the Chicago Board of Trade showed. The balance of bets is on a cut to 2.25 percent. The euro region's main rate is 4 percent.

Fed Boosts Lending to Banks as Credit Rout Continues

The Federal Reserve moved to add as much as $200 billion to the banking system over the next month to offset a deepening credit crisis that may have already pushed the U.S. economy into a recession.

The central bank raised to $50 billion each from $30 billion the amount intended for auctions of funds on March 10 and March 24. The Fed also said in a statement in Washington today that it will make $100 billion available through weekly 28-day repurchase agreements, where the central bank will lend cash in return for assets including mortgage-backed bonds.

The decision is the central bank's latest attempt to reduce the threat to the economy from banks curtailing loans to companies and households. Banks and securities firms have posted losses exceeding $188 billion since the start of last year as the impact of surging defaults on subprime mortgages rippled through world financial markets.

Given what we have seen in terms of illiquidity in the financial markets in the last four or five days, this came right in time, Ajay Rajadhyaksha, head of fixed-income strategy at Barclays Capital in New York, said in an interview with Bloomberg Television.

The Fed said it will increase the sizes of both the so- called Term Auction Facility operations and the repurchases if conditions warrant.

Interest Rates

Traders increased bets that the Fed will lower its benchmark interest rate by three quarters of a point this month after a government report showed the biggest job loss in five years, adding to evidence the economy is contracting. Odds of a smaller, half-point reduction fell to 6 percent from 26 percent yesterday, futures prices showed.

Fed officials said today's announcement wasn't related to the jobs report, and instead was aimed at addressing the deterioration in credit markets. The officials, speaking on condition of anonymity in a conference call with reporters, also said the measures won't expand the Fed's balance sheet.

At the same time, the central bank's balance sheet will likely change in composition as a result of today's announcements. Changes in the way the Federal Reserve Bank of New York accepts bids for repos will probably boost the level of mortgage-backed debt the Fed holds, while reducing the level of Treasuries, a Fed official said.

In effect, the Fed is using its own balance sheet to help banks and bond dealers finance assets riskier than U.S. government debt.

Investor Exodus

The move comes as investors are questioning the worth of even the highest-rated securities after Standard & Poor's and Moody's Investors Service assigned AAA grades to bonds backed by mortgages to borrowers who are now struggling to make their payments.

Carlyle Group's mortgage-bond fund was suspended in Amsterdam today after creditors forced the sale of some holdings, jeopardizing shareholders' capital. The fund borrowed to buy about $22 billion of AAA rated mortgage debt issued by Fannie Mae and Freddie Mac.

Citigroup Inc., the fourth-largest U.S. home lender by new loan volume, said March 6 it plans to pare its mortgage and home-equity loan holdings by about $45 billion, or 20 percent, over the next year.

Federal Open Market Committee members are next scheduled to meet on March 18. As credit stresses increased since the last gathering on Jan. 29-30, speculation has increased among traders that officials will consider lowering rates before the next meeting, as they did on Jan. 22.

Rate Target

Officials said they will keep the benchmark federal funds rate target around the level set by the FOMC, indicating they don't plan for the liquidity measures to drive the rate lower.

The central bank introduced the TAF, a lending tool that allows banks to give the Fed a range of collateral in return for loans, in December. The TAF loans for this month have a 28-day maturity.

What the Fed's saying with the TAF changes is, `We hear you and we want to ensure everybody has financing for good collateral,' said Joe Tully, managing director of the money- market desk in Newark, New Jersey, at Prudential Investment Management, which oversees about $55 billion.

The New York Fed said in a statement that the first of the 28-day repo operations will be conducted today, in the amount of $15 billion. It also said it will sell $10 billion of Treasury- bill holdings, to maintain a level of reserves consistent with keeping the federal funds rate around the current target.

Helping Banks

Repos allow the central bank to inject funds into primary dealers, a group of 20 banks that trade securities directly with the New York Fed. By contrast, the TAF operations offer funds to deposit-taking institutions; the most recent auction included 72 banks.

The Fed said it is in close consultation with other central banks. In December, the Fed loaned $24 billion to the European Central Bank and Swiss National Bank through a swap agreement to make more dollars available to banks in Europe.

If need be, we could certainly continue to coordinate with the Fed, ECB spokeswoman Regina Schueller said, citing remarks by President Jean-Claude Trichet.

The SNB said it has no plans to join in dollar auctions, spokesman Werner Abegg said.

Job Losses

The Fed is also trying to contain the fallout on the broader U.S. economy, which is moving closer to recession. Employers cut payrolls by 63,000 after a loss of 22,000 in January, the Labor Department said today.

The central bank said that the TAF operations will be continued for at least the next six months. Fed Chairman Ben S. Bernanke said in January that officials may make the resource a permanent addition to the Fed's toolbox.

Former Fed Chairman Alan Greenspan yesterday said March 5 that the credit markets won't recover until house prices stop falling. He said in a conference call organized by Deutsche Bank AG that home construction needs to decline to clear a surfeit of unsold properties and stabilize home prices.

I don't think there's that much the Fed can do about this, Harvard University economist Kenneth Rogoff, a former chief economist of the International Monetary Fund, said in an interview in Paris. It's very limited what monetary policy can do in the wake of a once-in-many-decades housing-price crash.

U.S. Stocks Drop to 18-Month Low After Foreclosures Hit Record

U.S. stocks fell to an 18-month low, led by banks, after home foreclosures climbed to a record and loan defaults by Thornburg Mortgage Inc. and a Carlyle Group bond fund spurred concern that credit losses are deepening.

Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. led financial shares to the lowest level since May 2003. Retailers J.C. Penney Co. and Gap Inc. fell on sales that trailed estimates. The Standard & Poor's 500 Index lost 10 points in the final half hour of trading as investors speculated tomorrow's U.S. employment report will show the economy has tipped closer to recession.

The S&P 500 tumbled 29.36 points, or 2.2 percent, to 1,304.34, the lowest closing level since September 2006. The Dow Jones Industrial Average lost 214.6, or 1.8 percent, to 12,040.39. The Nasdaq Composite Index decreased 52.31, or 2.3 percent, to 2,220.5. More than 11 stocks fell for every one that rose on the New York Stock Exchange.

It's a tough environment, Paul Rasplicka, who manages $4 billion at AIM Investments, said in a Bloomberg Television interview in New York. Lending terms are tighter. The willingness to extend credit is less. It's making it very tough for business.

Financial stocks dropped for a sixth day, the longest losing streak since November, after an industry report showed foreclosures surged at the end of 2007 and late payments rose to the highest in 23 years. The S&P 500 slid below its lowest close of the year on Jan. 22, the day Federal Reserve policy makers slashed interest rates by the most in 23 years in response to tumbling global stocks and concern the economy was contracting.

Banks Decline

Citigroup, the biggest U.S. bank by assets, fell 98 cents to $21.17, its lowest close since November 1998. Bank of America, the second-largest, decreased $1.03 to $36.52. JPMorgan, the No. 3, lost $1.37 to $37.37.

Yield spreads on some mortgage-backed securities climbed to 22-year highs today, signaling home loans will be more expensive for borrowers. The collapse in subprime mortgages has caused at least $181 billion of writedowns and credit losses worldwide, prompting banks to restrain lending.

J.C. Penney, the third-largest U.S. department-store chain, tumbled $5.34 to $42.77. Same-store sales last month dropped 6.7 percent, worse than the average estimate for a decline of 2.4 percent, according to Retail Metrics LLC.

Gap, the largest U.S. clothing retailer, lost $1.15 to $19.37. Sales fell 6 percent, almost twice the average estimate for a 3.1 percent decrease.

Luxury Department Stores

Nordstrom Inc., a luxury department-store chain, dropped $2.34 to $35 after posting sales that trailed estimates.

The S&P 500 Retailing Index declined 4 percent to the lowest since Jan. 17 as 30 of 31 members fell. The first drop in employment in more than four years in January and higher gasoline prices are causing Americans curtail spending. Gas prices climbed today and crude oil rose to a record $105.97 a barrel as the U.S. dollar fell to its lowest ever against the euro.

The S&P 500 Consumer Discretionary Index extended its decline to 2.6 percent after Fed data showed U.S. household wealth fell in the fourth quarter for the first time in five years and borrowing slowed as home values plunged and lenders restricted credit.

The Labor Department may report tomorrow that the U.S. added 23,000 jobs in February after losing 17,000 the previous month, according to the median estimate of economists surveyed by Bloomberg News.

`More Bad News'

People are expecting more bad news, said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages $5 billion in San Antonio. You're going to have a spillover effect into unemployment. It goes from one sector to another.

All 10 industry groups in the S&P 500 dropped, with 483 members posting declines. Financial shares were the biggest drag on the index, falling 3.7 percent as a group.

Merrill Lynch declined $3.46 to $45.86, the lowest since June 2003. The securities firm said it would sweeten the terms on $2.2 billion of convertible bonds that investors can redeem next week, giving them the prospect of a bigger ultimate payout.

Separately, Merrill and four of its Wall Street rivals had their first-quarter profit estimates cut by Keefe, Bruyette & Woods Inc. analyst Lauren Smith for the second time in less than a month. More than a dozen analysts have lowered first-quarter profit estimates for the biggest U.S. securities firms in the last two weeks on expectations of more debt-related writedowns.

18-Month Low

Goldman Sachs Group Inc. lost $6.32 to $158.65, an 18-month low. Bear Stearns Cos. retreated $5.88, or 7.8 percent, to $69.90 for the steepest decline since October 2000. Lehman Brothers Holdings Inc. fell $2.03 to $46.03. Morgan Stanley dropped $1.80 to $39.67, the lowest since October 2004.

Thornburg Mortgage lost $1.75, or 51 percent, to $1.65. JPMorgan sent a default notice after Thornburg failed to meet a $28 million margin call, Thornburg said. That triggered defaults on other financing agreements and the amounts involved are material. RBC Capital Markets wrote in a research note today that bankruptcy is now a more likely outcome for Thornburg. Shares of Thornburg, a jumbo home mortgage specialist, had changed hands for more than $12 last week.

Fannie Mae, the largest source of money for U.S. home loans, declined $2.57 to $21.70, the lowest since April 1995. Freddie Mac, the second-biggest, lost $1.50 to $20.14.

Washington Mutual Inc. dropped $1.04 to $11.76, the lowest since May 1996. Standard & Poor's lowered its credit rating on the largest U.S. savings and loan and said another cut is possible.

Missed Margin Calls

Carlyle Capital Corp., Carlyle Group's publicly traded mortgage bond fund, said it missed four of seven margin calls yesterday totaling more than $37 million. The fund, which raised $300 million in July and used loans to buy about $22 billion of AAA-rated mortgage securities issued by Fannie Mae and Freddie Mac, expects to get at least one more notice of default related to the margin calls.

Carlyle Group, started by David Rubenstein in 1987, is the world's second-biggest private-equity firm.

UBS AG's U.S.-traded shares dropped $1.31 to $29.52, the lowest since October 2003. Europe's biggest bank by assets likely sold its 25 billion francs ($24 billion) prime Alt-A mortgage portfolio in a fire sale, JPMorgan said as it lifted its credit-crisis writedown estimate for the bank to 18.5 billion francs.

`Painful Exercise'

Leverage is coming off across the system, said David Baker, the Boston-based chief investment officer at North American Management, which oversees $1.1 billion. It's going to be a painful exercise and I don't think the equity market has full appreciation of what it's going to mean and how it's going to be unwound.

New foreclosures jumped to 0.83 percent of all home loans in the fourth quarter from 0.54 percent a year earlier, the Mortgage Bankers Association said. The share of all home loans with payments more than 30 days late, including prime and fixed-rate loans, rose to a seasonally adjusted 5.82 percent, the highest since 1985.

The difference in yields, or spread, on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened about 11 basis points, to 227 basis points, the highest since 1986 and 93 basis points higher than Jan. 15. The spread helps determine the interest rate homeowners pay on new prime mortgages of $417,000 or less. A basis point is 0.01 percentage point.

More Capital Needed?

Ambac Financial Group Inc., the bond insurer that announced plans yesterday to raise $1.5 billion by selling common shares and equity units to salvage its AAA credit rating, dropped $1.28 to $7.42. JPMorgan analysts said the shares may fall in the near term and the company may need more capital to avoid a downgrade.

Wal-Mart Stores Inc. gained 43 cents, or 0.9 percent, to $49.98 for the only gain in the Dow average. The world's largest retailer said February sales increased 2.6 percent, exceeding its forecast, after price cuts spurred demand for groceries and medicines.

Fed Bank of New York President Timothy Geithner said the central bank may need to keep interest rates low for a while if financial markets remain under stress and threaten economic growth.

Traders priced in an 98 percent chance that the Fed will lower its benchmark lending rate by 0.75 percentage point to 2.25 percent by its March 18 policy meeting, up from 54 percent odds yesterday, according to Fed funds futures prices compiled by Bloomberg. The rest of the bets are for a 0.5 point reduction.

Treasuries rose and three-month bill rates fell to the lowest level since 2004 as investors took refuge in government securities.

You don't know when the next shoe is going to drop and where the next writedown is going to come from, said John Buckingham, who helps oversee about $700 million as president of Al Frank Asset Management in Laguna Beach, California. The news in the short run is likely to continue to be ugly. You have to have a strong stomach.

G-7 Says Growth May Weaken, Stops Short of Remedies

The Group of Seven nations said the U.S. economy may slow further and erode global growth, while stopping short of proposing specific measures in response.

Downside risks still persist, which include further deterioration of the U.S. residential housing markets, tighter credit conditions and heightened inflation expectations in some countries, a statement by G-7 finance ministers and central bankers said in Tokyo today. They kept up pressure on China to allow the yuan to appreciate and said they'd cooperate on foreign exchange as appropriate.

The G-7 nations are at odds on how to tackle a global slowdown sparked by a U.S. housing recession. The U.S. has encouraged its counterparts to use fiscal policy to revive growth. Japan and Canada say they won't follow suit and Germany argues attention should be paid to the causes of last year's credit- market rout rather than how to limit the economic damage.

A house-price collapse has pushed the world's largest economy close to a recession and the U.S. this week urged the G-7 to follow its example and take prudent action to protect their economies. Treasury Secretary Henry Paulson has negotiated a package, including tax rebates, worth $168 billion with Congress, and the Federal Reserve last month cut its key interest rate twice in nine days to 3 percent, the fastest easing of policy since 1990.

Slowing Growth

In all our economies, to varying degrees, growth is expected to slow somewhat in the short term, the statement said. In the U.S. risks have become more skewed to the downside.

German Finance Minister Peer Steinbrueck and U.K. Chancellor of the Exchequer Alistair Darling said yesterday that scope for coordinated action to shore up the global economy is limited.

The group consists of the U.S., the U.K., Canada, Italy, France, Germany and Japan. China didn't attend the main talks at this gathering.

The G-7 agreed that China should do more to defuse global trade tensions, reflecting European and Canadian concern that their currencies are bearing too much of the burden of the dollar's slide.

While the yuan has climbed 6 percent against the dollar since the October statement, it's risen just 2 percent against the euro in the same period. French Finance Minister Christine Lagarde said today that the stronger euro continues to pose difficulties for European exporters.

China's Yuan

We welcome China's decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we encourage accelerated appreciation of its effective exchange rate, the statement said. The language is similar to that used by the G-7 at their last meeting in October, when they singled out the yuan.

China overtook the U.K. as the euro area's biggest supplier last year. The euro has gained 11.5 percent against the dollar in the past year.

Global price pressures are making it harder for central banks to coordinate interest-rate policy. While the Bank of England this week cut its benchmark rate for the second time in three months and European Central Bank President Jean-Claude Trichet dropped a threat to raise rates, both central banks stressed inflation risks. October's statement contained no mention of global inflation risks.

May Coordinate Action

The G-7 omitted a commitment made at the last meeting in Washington to fiscal discipline. The group said it was possible they may agree to coordinate action to spur growth and ensure financial stability in the future.

The ECB and the Fed moved in concert with three other central banks in December to alleviate the credit squeeze in the biggest act of international cooperation since the Sept. 11 terrorist attacks.

Going forward, we will continue to watch developments closely and take appropriate actions, individually and collectively, in order to secure stability and growth in our economies, the statement said.

The G-7 pledged to act on the recommendations of the Financial Stability Forum of regulators, which today proposed measures to prevent a repeat of last year's credit crisis.

Italian central bank Governor Mario Draghi, who drafted the report, said banks should publish more information about their losses and improve risk management.

The report also said authorities must address potential conflicts of interest at credit-rating companies and improve understanding of banks' off-balance sheet positions, according to the statement.

The G-7 also asked the International Monetary Fund and the Basel, Switzerland-based Financial Stability Forum to report at the next meeting in April on their respective roles in identifying potential vulnerabilities and enhancing early warning capabilities, it said.

U.S. Stocks Fall on Bank Finance Concern; Countrywide Plunges

U.S. stocks dropped, led by financial shares, after pending home sales declined more than economists forecast and concern increased that credit for banks will dry up.

The Standard & Poor's 500 Index slipped 0.47 to 1,415.71 as of 11:43 a.m. in New York, erasing a 14-point advance after Countrywide Financial Corp. plunged the most since 1987. The Dow Jones Industrial Average fell 22.76, or 0.2 percent, to 12,804.73. The Nasdaq Composite Index lost 1.1 to 2,498.36.

Morgan Stanley's Cruz to Leave After Trading Losses

Morgan Stanley Co-President Zoe Cruz, the highest-paid female executive on Wall Street, will end her 25-year career at the firm three weeks after it disclosed $3.7 billion of losses on mortgage-related securities.

Morgan Stanley, the second-biggest U.S. securities firm by market value, named Walid Chammah, 53, and James Gorman, 49, to replace Cruz and Robert Scully as co-presidents, the New York- based company said today in a statement. Scully, 57, will join a newly created office of the chairman.

Cruz, 52, who oversaw trading, was viewed by analysts as a leading candidate to succeed Chief Executive Officer John Mack. Her departure adds to the list of banking executives who have stepped down amid a wave of credit losses tied to subprime home loans. Warren Spector, the former co-president of Bear Stearns Cos., was forced out in August, followed by Merrill Lynch & Co. CEO Stan O'Neal and Citigroup Inc. chief Charles Prince.

In this environment, if things happen on your watch, then the door is where you are pointed, said Ken Crawford, a portfolio manager at Argent Capital Management in St. Louis, which has about $950 million of assets, including Morgan Stanley shares. At investment banks of late, it's hard to say that big heads have not rolled.

Morgan Stanley shares have tumbled 23 percent this year, the steepest annual decline since 2002. While the stock lags behind the 13 percent gain by Goldman Sachs Group Inc., the biggest U.S. securities firm, it has outperformed the 38 percent drop at Merrill Lynch and the 39 percent slump at Bear Stearns.

Dollar again hits all-time low vs. euro

Greenback keeps losing ground amid growing unease about U.S. economy.

The dollar hit a new record low against the 13-nation euro on Thursday in thin holiday trading.

The euro spiked to $1.4873 before falling back slightly to $1.4844 in early European trading.

Its previous high of $1.4856 was hit Wednesday, before it settled at $1.4848 in late New York trading.

The dollar was unchanged against the yen, buying ¥108.68 - the same as in late New York trading. The British pound, meanwhile, rose slightly to $2.0652 from $2.0644 the night before.

The Thanksgiving holiday kept many players on the sidelines, while Japanese financial markets will be closed Friday for the Labor Thanksgiving Day holiday.

While the thin holiday trade could invite sudden, sharp moves, traders expected the market to be largely subdued for the rest of the day.

The euro, the pound and other currencies have been climbing steadily against the dollar since August amid fears for the health of the U.S. economy, stoked by the subprime credit crisis.

The dollar has been further weakened by U.S. interest-rate cuts - which can be used to jump-start an economy, but can also weaken a currency as investors transfer funds to countries where they can earn higher returns. The Federal Reserve has already cut rates twice.

Source - CNN Money

Freddie Mac: $8.1 billion writedown

Government-backed mortgage finance firm becomes the latest to feel the bite of credit market woes as losses soar.

As Freddie Mac reported a rough quarter, the company's CEO said the troubled housing market will take time to turn around.

Mortgage financing firm Freddie Mac rocked the credit markets further Tuesday as it reported a large loss along with an $8.1 billion drop in the value of its assets, as it set aside $1.2 billion to cover credit losses.

The firm reported a net loss of $2 billion, or $3.29 a share, in the period, wider than the loss of $715 million, or $1.17 a share, a year earlier.

Analysts surveyed by earnings tracker Thomson First Call had forecast that Freddie would trim losses to 22 cents a share in the period.

Shares of Freddie Mac plunged about 13 percent in pre-market trading immediately following the report.

While problems in the mortgage markets have been well-known for months, it had been hoped that Freddie Mac, which buys securities backed by the safest form of mortgages, would be spared the worst of the problems.

But Tuesday's report shows that the problems appear to be spreading. Freddie said that 0.51 percent of its single-family home loans were 90 days or more delinquent in September, up from 0.42 percent in June.

Without doubt, 2007 has been an extremely difficult year for the country's housing and credit markets and, as our third quarter financial results reflect, we have been impacted by the deterioration in these markets, said a statement from Chief Executive Richard Syron. Freddie Mac is a housing finance company operating in what today is a troubled housing and credit market. It will take time for this market to turn around.

Longer term, Syron said, Freddie Mac's outlook should be helped by the move by lenders to fixed-rate loans and away from variable-rate loans made to riskier borrowers.

Still, the company's financial statements included further signs of trouble beyond the decreased value of its assets and the increasing hit from loan losses.

Freddie said in order to meet the mandatory target for capital surplus, it has hired Wall Street firms Goldman Sachs and Lehman Brothers to help it consider very near term capital-raising alternatives. It said it might also need to slash its dividend by 50 percent and that it could be forced to limit the growth or reduce the size of its retained portfolio, slow purchases into its credit guarantee portfolio or issue additional preferred or common stock.

On Nov. 9, the other government-sponsored mortgage finance firm, Fannie Mae, reported lower earnings that raised questions about its accounting. Shares of Fannie have fallen nearly 25 percent since that report, and Freddie had fallen nearly 15 percent during the same period through the close of trading Monday.

Source - CNN Money

Yen Near 1 1/2-Year High Versus Dollar on Credit-Market Risks

The yen traded near a 1 1/2-year high versus the dollar as concern increased that credit-market losses will slow global economic growth, pushing investors to sell higher-yielding assets funded by loans in Japan.

Japan's currency rose against the Australian and New Zealand dollars, favorites of the carry trade, after stocks fell in the U.S. and futures showed equities in Tokyo are likely to decline today. Japan has the lowest benchmark interest rate among industrialized nations. Demand for the dollar may weaken on expectations a government report today will show U.S. housing starts dropped to a 14-year low in October.

This will be a good day for the yen, said Paul Milton, chief dealer at Societe Generale SA in Sydney. Asian stocks are likely to catch up with U.S. equities.

The yen traded at 109.74 per dollar at 7:57 a.m. in Tokyo from 109.76 late in New York yesterday. The yen rose to 109.13 per dollar on Nov. 12, the highest level since May 2006, and may advance to 109.30 today, Milton said. Japan's currency was little changed at 160.96 per euro from 160.95 yesterday. The dollar traded at $1.4664 per euro from $1.4665.

The yen climbed against all 16 of the world's most-active currencies yesterday as Goldman Sachs Group Inc. said in a report that Citigroup Inc., the largest U.S. bank by assets, may write down $15 billion in collateralized debt obligations over the next two quarters.

The Standard & Poor's 500 Index fell 1.8 percent yesterday. Nikkei 225 Stock Average futures due in December traded at 14,765 in Chicago, compared with the index's close yesterday in Tokyo of 15,042.56. The two-year Treasury note's yield fell to the lowest since 2005 as investors sought safety in U.S. government debt.

Yen Strength

The market is very nervous, said Jonas Thulin, a senior currency strategist at Calyon Securities Inc. in New York. People are holding a sober view that we haven't seen the worst from the subprime and credit issue yet. It pushed people to buy the yen and sell risky assets.

The yen has strengthened against all 16 most-traded currencies this month, gaining 12 percent versus Australia's dollar and 8.3 percent against New Zealand's.

In carry trades, investors borrow money in low-yielding economies such as Japan and lend the funds in high-yielding countries to profit from the spread. The risk is that currency moves wipe out earnings. When the trade weakens, traders sell higher-yielding assets and buy yen to repay borrowings.

The benchmark rate in Australia is 6.75 percent while New Zealand's is 8.25 percent. Japan's borrowing cost is 0.5 percent.

Jitters in the market contributed to the strengthening in the yen, said Stephen Malyon, a currency strategist at Scotia Capital Inc. in Toronto.

U.S. Housing Starts

The U.S. currency weakened to an all-time low of $1.4752 per euro on Nov. 9. The dollar has lost 10 percent against the euro and 7.8 percent versus the yen this year as two rate cuts by the Federal Reserve dimmed the allure of U.S. assets.

Today's Commerce Department report will show housing starts fell to an annualized rate of 1.17 million in October, from 1.19 million during September, according to a Bloomberg survey. The data is scheduled for release at 8:30 a.m. Washington time.

The Fed is scheduled to release the minutes from its Oct. 31 meeting at 2 p.m. in Washington. The central bank cut the target rate for overnight loans between banks to 4.5 percent last month, after a 50-basis-point reduction in September. The central bank is also expected to release quarterly forecasts for the economy and inflation.

Futures traded on the Chicago Board of Trade show the odds of the Fed cutting interest rates a quarter-percentage point to 4.25 percent on Dec. 11 are 96 percent, compared with 72 percent a month ago.

Spread Narrows

The National Association of Home Builders/Wells Fargo index of builder confidence held at 19 for a second month in November, the lowest since records began in 1985, the Washington-based association said yesterday.

The yield advantage of U.S. two-year Treasuries over comparable-maturity Japanese government debt shrank to 2.41 percentage points, the narrowest since October 2004, making U.S. assets less attractive to international investors.

Source - Bloomberg

Credit crunch, Act 2

Washington Mutual is reeling from a one-two punch of bad loans and a probe into past appraisals. But it may not be alone.

What the heck's happening to our financial system?

That will be a question many people will be asking after Washington Mutual shares plunged 17 percent in a single day. This after all is an industry-leading bank with over $320 billion in assets.

Seattle-based WaMu was whacked by two pieces of bad news on Wednesday.

First, the bank said its bad loans could remain a problem into 2008.

Second, as part of a wider probe of the mortgage industry, the New York Attorney General Andrew Cuomo demanded that Fannie Mae and Freddie Mac examine whether mortgages sold to them by Washington Mutual were for homes that had been appraised at an artificially high price.

The fear is that Fannie and Freddie might cut back on purchases and guarantees of loans from WaMu . That would be a crippling blow for the bank, because the market for loans that Fannie and Freddie buy is the only part of the mortgage market that has substantial volume.

Washington Mutual's situation is particularly worrisome, but its issues highlight the sort of bad news that could start to come from other banks.

One: Bad loan problems are spreading out of subprime mortgages and into other types of loans.

Two: If Cuomo's allegations are true, WaMu could be holding mortgages on properties that are worth a lot less than its balance sheet says. And investors are fleeing plenty other bank stocks because they don't trust banks' balance sheets.

If those are the two main issues, credit crunch fears won't ease until there is good evidence that bad loans have peaked for all types of credit - from credit card loans to non-junk mortgages to commercial real estate loans. Banks are only beginning to talk about problems in these nonsubprime areas, so it could be several quarters before it's clear how affected they will be.

Investors need to begin to feel that banks have revealed all the losses on their balance sheets. Citigroup has stated that it could report mortgage-related losses of up to $11 billion in the fourth quarter, and Merrill Lynch is expected to report more writedowns, following its $8 billion in the third quarter.

And Morgan Stanley announced a $3.7 billion writedown late Wednesday.

Auditors are breathing down managements' necks, with the backing of regulators, so a bank would have to be very foolish not to take an accurate count of losses in this quarter.

However, it's not quite as simple as gradually working some bad assets out of the financial system. The process of dealing with current losses could be complicated by internal turmoil at the banks and, worst of all, a real slowdown in the economy.

The CEOs of Merrill and Citi have departed their posts, leaving leadership vacuums and more opportunity for infighting at those two banks.

The other common feature of post-boom crack-up is scandals that stem from fraud committed during the go-go period. If true, Cuomo's claims about artificially high real estate appraisals at WaMu would lead to high-level resignations at the bank, for example. And if the Securities and Exchange Commission probe of Merrill's mortgage portfolio comes up with any real dirt, there could be more turmoil and departures there.

The most sobering thought about the credit crunch so far is that it's happened without anything approaching a recession. Difficulties in the financial system could slow the economy and that in turn that would create new losses at the banks.

If it wanted to, the Federal Reserve could just cut interest rates and cheaper borrowing costs would help the banks and spark economic activity. But with the threat of inflation and the weak dollar, the Fed doesn't have much room to maneuver.

Sorry, but we're only just moving into the second act of the credit crunch.

Source - CNN Money

U.S. Economy Grew More Than Forecast in Third Quarter

Economic growth in the U.S. unexpectedly accelerated in the third quarter as increases in exports, consumer spending and business investment made up for another plunge in home construction.

Gross domestic product grew at an annual rate of 3.9 percent in the quarter, the most since the first three months of 2006, compared with a 3.8 percent pace in the prior quarter, the Commerce Department said today in Washington. The Federal Reserve's preferred price gauge rose more than forecast.

The report comes as Federal Reserve policy makers meet to set interest rates, with most economists predicting officials will lower their benchmark rate for a second month. The figures may give the central bank reason to signal it isn't inclined to make further reductions, analysts said.

Looking forward, the Fed is probably still going to argue that the economy is softening, said Peter Kretzmer, a senior economist at Bank of America Corp. in New York. The language in today's statement could become a little more indicative of a Fed that will be reluctant to move again.

The median forecast of 82 economists surveyed by Bloomberg News projected the growth rate at 3.1 percent. Estimates ranged from 2.0 percent to 4.0 percent.

The dollar strengthened against the euro and yen in the minutes after the GDP report was released, before later paring its gain. Treasury notes declined. A report from the National Association of Purchasing Management-Chicago today showed business activity unexpectedly shrank this month.

Advance Report

Companies in the U.S. added 106,000 jobs in October, more than economists had forecast, according to a report today from ADP Employer Services. A report from the Labor Department also showed employment costs rose in the third quarter at a slower pace than in the previous three months, suggesting increases in wages and benefits aren't heating up inflation.

The GDP report is the first for the quarter and will be revised in November and December as more information becomes available.

The Fed's preferred inflation gauge, which is tied to consumer spending and strips out food and energy costs, rose at a 1.8 percent annual pace following a 1.4 percent increase the prior quarter, according to the report.

The gain leaves prices within the 1 percent to 2 percent range policy makers, including Ben S. Bernanke before becoming Fed chairman, have said is their preferred zone.

Certain Rate Cut

Federal funds futures indicate a near certainty that the Fed will cut its benchmark rate by 25 basis points today to 4.5 percent, following its half percentage point cut on Sept. 18. The Fed will announce its decisions today at around 2:15 p.m.

Consumer spending grew at a 3 percent pace following a 1.4 percent increase in the prior quarter, contributing the most to the gain in growth. Still, many economists project spending will slow as declining property values turn Americans pessimistic.

The dreaded collateral damage from the housing market hasn't showed up yet in consumer spending, though it's just a matter of time, said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. The economy will probably expand at a 1.8 percent pace in the current quarter, according to the median forecast of economists surveyed earlier this month.

Consumers weren't the only ones buying last quarter. Gains in both commercial construction projects and purchases of equipment and software contributed to a 7.9 percent increase in business investment. The 5.9 percent rise in spending on new equipment was the biggest since the first quarter of 2006.

An increase in inventories contributed another 0.4 percentage point to growth.

Rise in Exports

The economy was also buttressed by a narrowing of the trade deficit that added 0.9 percentage point to the rate of expansion. The gap shrank to $546.2 billion at an annual pace, the smallest since the last three months of 2003.

General Electric Co.'s third-quarter profit rose as large- equipment orders climbed 39 percent amid a surge in demand from countries that are building airports and power grids, the Fairfield, Connecticut-based company said Oct. 12.

We see orders everywhere around the world, GE's Chief Executive Officer Jeffrey Immelt said on a conference call earlier this month. That seems to be accelerating, not diminishing.

Home construction remained the biggest drag on GDP, the report showed. A 20.1 percent plunge in homebuilding, the seventh consecutive decline, subtracted a percentage point from growth.

Credit restrictions since the August collapse in subprime lending intensified the blow to housing at the end of the quarter. Existing home sales in September fell 8 percent from the prior month, while housing starts declined 10 percent to the lowest since March 1993, reports earlier this month showed.

Source - Bloomberg

The price of everything, in flux

These days, the value of housing, stocks, bonds and even a spouse seems to be up in the air.
"No one knows what anything is worth." Lately I've heard that from lots of people. We're in one of those odd periods when things feel unmoored.

Six months ago you knew, or at least you thought you knew, what your house would sell for. Now you probably don't. The bond market is quaking with fear about the credit crisis, while the stock market is saying rock on.

"Either U.S. economic conditions are really not that bad after all, or investors are suffering from a collective attack of wishful thinking," Martin Barnes, editor of the Bank Credit Analyst, wrote recently.

Valuation is supposed to be a science, sort of, but there are times when it feels more like a demented form of multivariable calculus. Bond guru Bill Gross of Pimco recently wrote that "the modern financial complex has morphed into something unrecognizable to many astute market veterans and academics."

But while you may not be able to analyze the price of a security right now, you can at least analyze the insecurity.

The first issue is that the nationwide decline in home prices that wasn't supposed to happen -- even Alan Greenspan said he didn't expect it -- and there's no historical precedent for it.

The inventory of unsold and new homes is still extremely high, which suggests that a "clearing price" -- a price that buyers and sellers agree upon -- has yet to be found. It's hard to feel secure when your feet can't touch the bottom.

But the scariest thing is that today the price of every asset -- houses, stocks, and bonds -- seems to rest on a foundation that looks increasingly shaky. David Wyss, the chief economist at S&P, puts the losses from the subprime meltdown at around $150 billion, a manageable figure in and of itself. But the subprime crisis was like a termite coming out of the wall. It made everyone start worrying that there were deeper problems.

In the past few years, there's been an explosion of what the Street calls "structured credit" -- everything from mortgages to loans used to finance LBOs was carved up into exotic new securities and sold to buyers who didn't understand what they were purchasing.

Now it turns out that Wall Street didn't understand its own mad, tangled creations either. A Bank of England official called the tests that financial firms used to measure the risk of these new products "completely hopeless." Firms from Citigroup to Merrill Lynch have declared multibillion-dollar write-downs due to losses on these products. And they're still guessing.

In August a Morgan Stanley equity analyst recommended that investors buy the stock of insurer Ambac, which guarantees the payment on billions of dollars of bonds backed by subprime mortgages. A Morgan Stanley fixed-income trader promptly fired off an e-mail calling the recommendation "absurd." "My analyst has no idea how to value" the securities Ambac guarantees, he wrote. "No one in the world can put a definitive view on recovery levels" for some of these bonds.

The subprime crisis was also the first visible sign of a weird inversion that took place during the past few years. Instead of the value of an asset dictating the amount of debt you could use to purchase it, the availability of the financing began to dictate the price of the asset.

In 2004 even the Federal Reserve Bank of New York argued that a chunk of the increase in house prices was justified by the easing of lending standards. "The price exists at the pleasure of the financing," is how one hedge fund manager put it to me recently. "That is true for stocks and houses and bonds and buyouts." But if the financing doesn't exist, or only maybe exists, then how do you determine price?

In early October a Craigslist posting, in which a self-described "spectacularly beautiful 25-year-old girl" asked for advice on meeting a man who made at least $500,000, sparked a raging debate on how you measure the value of a man or a woman.

How appropriate :-).

Source - CNN Money

Early signs of easing seen in subprime lending

Former Federal Reserve chairman Alan Greenspan defended the U.S. subprime mortgage market Monday, arguing that the securitization of home loans for people with poor credit not the loans themselves were to blame for the current global credit crisis.

Greenspan also said there were some early signs of an easing in the crisis, but warned that the longer term effects on the economy were still being determined.

"Subprime mortgages were and are risky, but they are worth it," Greenspan said, adding that is better to have a larger property owning class with a vested interest in the system.

"I'm terribly concerned that we would cut back on the availability of subprime that has enabled a very significant increase in mortgages among minorities in the United States," he added.

The current credit market turmoil began with rising defaults in the United States on subprime mortgages. Those problems have since spread as banks repackaged risky loans with the more reliable and sold them to a wide range of investors, including several European banks.

Credit dried up in early August, roiling financial markets, as banks became wary of exposure to the risky loans.

Greenspan acknowledged that a number of people should not have been taking out those mortgages, but that the current crisis was due "not the subprime problem itself, but to the securitization of subprime."

Greenspan said there are "some positive signs" that the crisis is calming.

"For example, the yields on what has been the poster child of this crisis, asset backed commercial paper, have jumped up sharply," he said. "It has since come down, but not all the way."

Similarly, the interbank lending rate, which jumped in recent weeks amid fears about insolvencies, have started to come down, but "not all the way," he said.

"We are not through with this yet," he added, suggesting there could still be what he termed an "Act II," in which falling house prices feed into slower consumer spending.

However, he reiterated earlier comments that he believed the probability of a recession in the United States was "less than 50/50."

Greenspan also implicitly criticized the role of ratings agencies in the crisis.

"The problem was that people took that as a triple-A because ratings agencies said so," he said. Yet when they tried to sell the products they ran into difficulties, which shook confidence.

"What we saw was a 180 degree swing from euphoria to fear and what we've learned over the generations is that fear is a very formidable challenge," Greenspan said.

Ratings agencies such as Standard & Poor's Corp., Moody's Investors Service Inc. and Fitch Ratings have come under fire for being slow to lower their ratings on securities based on mortgage loans to U.S. borrowers with poor credit records.

Source - The Associated Press