The injection of $130 billion into the financial markets by
the European Central Bank was the largest amount ever
provided in a single operation, exceeding the amount added
after the Sept. 11, 2001, attacks. It came after France's
biggest bank, BNP Paribas, froze three funds that had
invested in the troubled U.S. mortgage market. The move sent
banks in Europe scrambling for cash. The Federal Reserve
followed by adding $24 billion to the U.S. banking system.
These Central Banks are private institutions. These banking Masters of the
Universe orchestrate the ups and downs in markets worldwide. They have no right
to have such power.
rkm
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Original source URL:
http://www.washingtonpost.com/wp-dyn/content/article/2007/08/09/AR2007080900311.html?wpisrc=newsletter
Credit Crunch In U.S. Upends Global Markets
Fed, European Banks Add Funds as Dow Tumbles 387
By Tomoeh Murakami Tse and David Cho
Washington Post Staff Writers
Friday, August 10, 2007; A01
NEW YORK, Aug. 9 -- The turmoil in the U.S. credit markets turned global
Thursday, prompting central banks in Europe and the United States to pump more
than $150 billion into the financial system to keep it operating smoothly.
U.S. stocks suffered their second-worst decline of the year as the cost of
borrowing for corporations continued to rise and some investors urged
policymakers to help.
Some economists predicted that the tightening credit market would be a drag on
the economy, but others said the impact would be minimal. Yet signs were
emerging that the nation's credit problems were spreading in unpredicted ways.
Home buyers in the Washington area, for example, where housing costs have
surged, are facing higher rates for "jumbo" mortgages. New companies, which rely
on credit, are finding it harder to get loans for business needs. And it may be
more complicated to close major deals, such as the $45 billion acquisition of
TXU by the buyout firm Kohlberg Kravis Roberts.
The injection of $130 billion into the financial markets by the European Central
Bank was the largest amount ever provided in a single operation, exceeding the
amount added after the Sept. 11, 2001, attacks. It came after France's biggest
bank, BNP Paribas, froze three funds that had invested in the troubled U.S.
mortgage market. The move sent banks in Europe scrambling for cash. The Federal
Reserve followed by adding $24 billion to the U.S. banking system.
[In Japan, the central bank added $8.4 billion to money markets Friday, the
Associated Press reported.]
Jonathan Muellen, a spokesman for BNP Paribas, said the bank froze the three
funds after liquidity, or the ability to easily trade assets, evaporated in the
U.S. mortgage market. He said about a third of the funds, which had a value of
$2.2 billion as of Aug. 7, were invested in securities backed by U.S. mortgage
loans made to borrowers with poor credit.
"We've no longer been able to find prices for the assets, despite the fact the
quality of the underlying assets has remained high," he said. "If there's no
pricing . . . we can't find the net asset value for the funds each day, which is
something we must do to allow people to buy in and exit the funds."
U.S. stocks dropped significantly on the news. The prices of "safe" investments,
such as U.S. Treasurys, soared. Major indexes gyrated throughout the day from
speculation that other mutual funds were frozen or that more hedge funds had
suffered credit-related blowups.
"Shock waves are reverberating from Europe," said Les Satlow, portfolio manager
at Cabot Money Management. "It just illustrates how on edge the market it is."
[The stock market in Tokyo was down about 2 percent by mid-afternoon Friday.
Other Asian markets also fell, with Hong Kong's Hang Seng index down 3 percent
and South Korea's Kospi index down 4 percent.]
The Dow Jones industrial average of 30 blue-chip stocks fell 387.18 points
Thursday, or 2.8 percent, to close at 13270.68. On Feb. 27, the Dow dropped 3.5
percent on concerns about the housing market and other economic issues. The
Standard & Poor's 500-stock index, a broader market measure, fell 44.40 points,
or 3 percent, to 1453.09. The tech-heavy Nasdaq dropped 56.49, or 2.2 percent,
to 2556.49.
Stocks in every sector were battered, although companies in health care,
utilities and consumer products that would be less affected by a credit crunch
fared better. Particularly hard-hit were the shares of financial companies. The
declines were sharp enough to trigger automatic trading curbs at the New York
Stock Exchange that are designed to limit wild swings in trading.
The most pressing issue for the markets is the deteriorating condition of the
credit markets, a $28 trillion segment of Wall Street that provides virtually
all loans for corporate enterprises and the real estate industry. After years of
lending at generous rates and terms, these markets have tightened up, as fewer
lenders want to take on risky loans.
The problem is compounded because credit markets, in recent years, have evolved
in complex ways. Hedge funds and other financial firms have developed tools
called derivatives and credit-default swaps that slice and dice loans into
pieces sold around the world. Many of these instruments are so obscure and
traded so infrequently that it is difficult to know what some of them are worth.
The first signs of trouble appeared in February after lenders reported record
defaults in subprime mortgages, or loans sold to people with questionable credit
histories. More recently, companies with poor credit have been denied loans.
Now, even credit-worthy borrowers are struggling to obtain access to debt.
Since June 20, 46 corporate loans worth $60 billion have been postponed or
reduced in size, compared with last year when no deals were pulled, said Baring
Asset Management, a global investment-management firm.
Companies, especially those in the mortgage industry, could suffer without easy
access to money.
Countrywide Financial, the nation's largest mortgage company, said Thursday that
it faced "unprecedented disruptions" in the credit markets that could severely
damage the company's financial condition. Private buyouts of billion-dollar
companies could be scuttled or their prices could be reduced, because such deals
rely heavily on debt for their financing. Some banks are exploring ways to
reduce their exposure to bad buyout deals. Home Depot said Thursday that it may
drop the price of its HD Supply unit, which it agreed in June to sell to Carlyle
Group of the District and a group of other private-equity firms for $10.3
billion. Home Depot also announced that it was lowering its $22.5 billion
buyback offer to shareholders, citing "current market conditions." The company
had planned to fund much of its buyback with loans, now an issue because of the
higher cost of obtaining such debt.
Some analysts worry about companies if the credit markets are crippled for a
significant amount of time.
"I don't think we sit on the precipice of a systemic breakdown, but the longer
the situation goes on the more problematic it becomes for the economy," said
Scott MacDonald, research director at Aladdin Capital Management.
The problems are also beginning to affect consumer spending, a key component of
the economy. A report Thursday showed that July was a difficult month for
retailers, a sign that a slumping housing market may have reined in spending,
said Ken Perkins, president of the research firm Retail Metrics. Last month, 61
percent of retailers missed sales growth expectations for stores open at least a
year. The norm is 42 percent.
"It's only going to get worse as it gets harder for consumers to get credit and
make purchases," MacDonald said.
The Fed has been criticized for not cutting interest rates to calm the markets.
Critics accused Chairman Ben S. Bernanke and his colleagues of not grasping the
severity of the financial markets' turmoil.
"I fear that we may be significantly underestimating the magnitude of risk that
remains in the markets," which could cause "significant disruption" to the
economy, Joint Economic Committee Chairman Sen. Charles E. Schumer (D-N.Y.) said
in a letter to the Federal Reserve this week.
Other critics said the European Central Bank's louder approach may have worsened
the situation by alarming investors. "I look at it as an unprecedented
response," Douglas Couden, portfolio manager for SCM Advisors, said of the
European bank's move. "To the domestic equity portfolio manager like myself,
it's just further proof that what started in subprime, which has spread to
credit markets, is just showing up again abroad, which means it's more global in
scope and it's real. It's real contagion."
President Bush said Thursday that he did not think federal regulators needed to
step in to add more money to the financial system. He said the underlying
economy remained strong. "I am told there is enough liquidity in the system to
enable markets to correct," he said.
The Fed sought to reassure investors earlier this week. On Tuesday, central bank
policymakers voted to hold the benchmark rate at 5.25 percent, saying they
expect the U.S. economy to weather the financial storm.
The Fed's action implied that the policymakers did not then see signs of a
crisis requiring their intervention because they generally prefer to let
investors sort out the problems. So far, Fed officials have welcomed investors'
newfound appreciation of the risk inherent in many securities backed by
mortgages and other loans.
The U.S. central bank hopes the process continues in an orderly manner, but Fed
officials also know that such a restrained adjustment may give way to panic. The
bank's action Thursday shows it is closely monitoring developments and would
intervene if necessary to steady markets.
Many investors are betting that the Fed would cut its benchmark interest rate by
late next month, although some analysts said Fed officials do not want to pour
more fuel on the fire: they see many of the recent excesses in the mortgage
markets and the corporate buyout boom related to easy money. Making money
cheaper to obtain might encourage more reckless lending, while at the same time
bailing out investors who had made risky bets.
"We do not look for a rate cut any time soon," economists at Lehman Brothers
said in a note to clients yesterday.
Some analysts say the Fed's response would depend on how much this credit
squeeze affects the broader economy, which at this point is hard to predict.
"The most difficult question is how does this get worked out," said Richard A.
Yamarone, director of economic research at Argus Research. "And really it's a
dart toss, it's anyone's guess. If you ask a million economists you probably
will get two million ways how it works out."
Staff writer Nell Henderson contributed to this report.
© 2007 The Washington Post Company
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