Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Subprime Mortgage Mayhem Spreading! Stock Markets Plunging!

Stock-Markets / Subprime Mortgage Risks Aug 10, 2007 - 08:18 AM GMT

By: Money_and_Markets

Stock-Markets

Mike Larson writes: If you think yesterday's 2.8% plunge in the Dow was severe, take a look at the shellacking of bank and brokerage stocks: Down 5%, 6%, even 7% across the board.

Why are things getting so hairy? Precisely because of the spreading mortgage market mayhem I've been warning about!


Virtually every day, another "tape bomb" — news of some unexpected loss in some part of the world — goes off.

Yesterday, it was France's turn. BNP Paribas, the largest bank in that country, froze three funds that invest in asset-backed securities (ABS). Those are bundles of loans (credit cards, auto loans, etc.) that are packaged together into bonds and sold to investors who want to generate income.

BNP said it will not allow investors to deposit or withdraw money out of its three funds. In fact, it won't even provide a value for the funds — Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia, which recently had combined assets of about $2.76 billion.

BNP's reason for the freeze …

"The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating."

In plain English, they're saying that the subprime mortgage meltdown is causing pricing for all kinds of structured bonds to go haywire. Interestingly enough, BNP's move caused problems of its own. Namely …

The European Money Markets Went Absolutely Haywire!

BNP Paribas was the latest bank to drop a subprime mortgage bomb on the markets.

The overnight London Interbank Offered Rate (LIBOR) soared to 5.86% from 5.35%, according to the British Bankers Association. That put it at the highest level since the start of 2001.

Let me explain why this is so significant …

The overnight LIBOR is what banks charge each other when they lend money back and forth for 24-hour periods. These extremely short-term loans are generally risk-free. I mean, what bank is going to get into so much trouble in 24 hours that it can't pay you back?

Because of the low risk involved, LIBOR rates usually only move when central banks change their own rates. Since there were no major central bank changes made in the last day, the surge in LIBOR can only be tied to one thing: Abject fear of major bank losses!

This was so out of the ordinary, in fact, that the European Central Bank (ECB) responded by flooding the European money markets with a whopping $130 billion in instant liquidity. That was the single-biggest liquidity injection since the day after 9/11!

For months, we've had to listen to a bunch of government blather about how the housing and mortgage market problems are "well-contained." We've been told not to worry … that it'll all be over soon … or that the housing market "bottom" is in.

But if things are so contained, then why the heck are central bankers freaking out? Why are European policymakers throwing the most money at the markets since right after the biggest terrorist attack on U.S. soil in history?

It wasn't just the ECB, either. The U.S. Federal Reserve followed up the ECB's move by adding $24 billion in temporary money to our banking system. That was the most since April, according to Bloomberg. And the Bank of Canada felt it necessary to issue a statement saying that it will "provide liquidity" to "support the stability of the Canadian financial system and the continued functioning of financial markets."

This Is a Stunning Reversal of Fortune in Just a Few Days

What makes this turn of events so amazing is that these emergency measures came just two days after the U.S. Fed met to talk policy.

What happened at that meeting? Well, in 1975, the New York Daily News ran a famous headline: "Ford to City: Drop Dead." The paper was referring to Then-President Gerald Ford's refusal to help the New York City government survive a financial crisis.

Ben Bernanke downplayed the risks of subprime mortgages just two days ago.

This week, Federal Reserve Board Chairman Ben Bernanke didn't quite go that far. But he clearly stated that the Fed wasn't going to come to the rescue of skittish hedge fund managers, private equity millionaires, and Wall Street head honchos.

Specifically, Bernanke kept interest rates unchanged on Tuesday. And while he acknowledged the credit problems in the market by saying,

"Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing."

… He also added language reiterating the Fed's anti-inflation "bias,"

"Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.

"Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected."

In other words, there was no sign of panic … no hint that things were really coming unglued … and certainly no indication that within 48 hours, tens of billions of dollars of excess liquidity were going to be poured into the markets.

I think it must be becoming abundantly clear to policymakers that …

Mortgage Bombs Are Going Off Everywhere

You know I've been chronicling the mortgage market's struggles for several months. I've told you many a financial horror story. But if you can believe it, things are getting even worse. I'm literally seeing mortgage companies and mortgage stocks implode almost every day now …

  • HomeBanc Corp. (HMB) , a lender with operations around the Southeast U.S., just announced it will stop originating mortgages. The company said it can't borrow on its credit facilities and that it could no longer fund loans as of August 6.
  • Another lender, Aegis Mortgage out of Houston, suspended all of its mortgage originations as well. Said a company spokeswoman, "We're going to have to suspend lending until we get this figured out." Yikes!
  • Mortgage firm Delta Financial (DFC) tanked more than 40% on Wednesday. The company pushed back its scheduled earnings release, declining to say why or when it would release an update.
  • Mortgage REIT Luminent Mortgage Capital (LUM) just said it would suspend its dividend payments and push back an earnings conference call it had previously scheduled. Lenders are increasing margin calls and pulling back on funding for the company's operations. The stock plunged 30.8% on Monday alone, then kept on falling. It's now down a whopping 92% in 2007.

You know what Luminent's CEO recently said? "In my almost 30 years in the U.S. mortgage-backed securities market, I have never before seen the intensity of confusion, uncertainty and outright fear as right now."

In other words, things are ugly with a capital "U!"

Here's My Message to You …

These developments have been coming at traders fast and furious. That's why you're seeing such violent swings in the market, with the Dow down almost 300 points one day, then up 300 points the next.

My suggestion: Don't focus on the day-to-day swings. Focus on the big picture. And that big picture can be best described as follows:

1. The credit markets are in disarray …

2. The fundamentals in the housing and mortgage markets remain dismal …

3. And the likelihood of a 1998-style meltdown is still high.

Even if I'm wrong, and we don't get a broad U.S. market meltdown, certain sectors will likely continue to struggle.

Continue to avoid mortgage lenders, home builders, and most REITs like the plague. Keep those hedges we've discussed in Safe Money Report in place. And consider taking even more profits off the table.

Until next time,

By Mike Larson

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in