Global banks ride to rescue

[Marcus Marulus]

Global banks ride to rescue

By Patrice Hill

August 11, 2007



U.S. Federal Reserve Chairman Ben Bernanke

Reports that two the nation's largest home lenders were having trouble getting funds for mortgages prompted the world's central banks yesterday to step up rescue efforts with a record $323 billion of cash infusions aimed at averting a market crisis.

The Dow Jones Industrial Average plunged more than 200 points in morning trading amid the spreading cash and credit crunch, but the cash injections comforted investors and, along with a statement of assurance from the Fed, helped to curb market losses. The Dow ended down 31 points at 13,240. Markets in Europe and Asia did not fare as well, experiencing losses of 3 percent to 4 percent.

Central banks in the United States, Europe, Japan, Australia and Canada initiated their biggest rescue operations since the September 11, 2001, terrorist attacks, repeatedly injecting tens of billions of dollars in cash into global bond and mortgage markets in an attempt to ease the crisis of confidence.

The Federal Reserve, contributing $38 billion through its New York lending window, in an unusual statement, said it was "providing liquidity" to ensure the smooth functioning of financial markets because "dislocations in money and credit markets" are hampering funding efforts of banks and savings and loans.

The Fed's action came as the Securities and Exchange Commission began investigating the exposure of major Wall Street investment houses to problem loans as well as potential improprieties in how and whether they assigned proper market values to such mortgage securities.

While the Fed stopped short of cutting interest rates — it only this week announced that wouldn't be necessary — its participation in the global rescue operation prompted widespread speculation that it will be forced to cut rates within days or weeks to keep the credit virus from spreading and infecting the economy.

"The fact that the central banks are coordinating their moves on liquidity suggests that the problems are bigger than people think," said Timothy Woolston, investment manager at Boston Advisors LLC. "But it also suggests that the central banks are on top of this."

Countrywide Financial Corp., the largest home lender in the United States, and Washington Mutual Inc., the largest savings and loan, appeared to trigger yesterday's chain of events with disclosures about their funding troubles in Securities and Exchange Commission filings Thursday evening.

Washington Mutual said that market funding for mortgages made to borrowers below the top credit grade had "diminished significantly." Countrywide said "unprecedented disruptions" in mortgage markets are crimping profit and making it difficult to secure funding for loans.

Countrywide said late payments on loans to homeowners with the highest credit ratings have more than doubled since last year, and the lack of interest among investors in buying mortgages has prompted the lender to retain loans in its own portfolio while tightening its standards for borrowers.

"The secondary market and funding liquidity situation is rapidly evolving, and the potential impact on the company is unknown," Countrywide said. "These conditions may continue or worsen in the future."

The statements from Countrywide and Washington Mutual were especially alarming for central banks since neither specialized in subprime or subpremium loans, unlike other lenders that have been forced out of business this year by rising defaults. Both lenders are more like banks in occupying the vast middle ground of mortgage lending, where the crunch has spread to affect ordinary home buyers in recent days.

"The central banks of the U.S. and Europe are saying they're not going to have a liquidity crunch" like the one being reported by Washington Mutual, said Theodore Ake, head of U.S. government bond trading at Mizuho Securities USA Inc. "They will let the chips fall where they may in terms of bad loans, but they will provide liquidity."

Roger M. Kubarych, economist at UniCredit Markets, said nearly half of commercial bank holdings in the United States, or nearly $5 trillion, are in mortgage loans and securities. But he said that until now, banks have been experiencing robust earnings and good loan performance, and are in solid enough condition to withstand the current credit crunch.

"It would take further shocks over and above what is now publicly known to create a situation in which the stability of the U.S. banking system" requires the Fed to cut interest rates, he said.

The International Monetary Fund added its voice to those of central bankers seeking to douse the fires in the markets yesterday, saying the worldwide credit crunch brought on by the U.S. subprime crisis is "manageable."

"While the situation is still evolving, we continue to believe that the systemic consequences of the reassessment of credit risk that is taking place will be manageable," said IMF spokesman Masood Ahmed. "The fundamentals supporting strong global growth remain in place, and the re-establishment of credit discipline that is occurring is a healthy development."

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