Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Social Mood and Leaders Impact on General Election Forecast 2019 - 9th Dec 19
Long-term Potential for Gold Remains Strong! - 9th Dec 19
Stock and Financial Markets Review - 9th Dec 19
Labour / Tory Manifesto's Impact on UK General Election Seats Forecast 2019 - 9th Dec 19
Tory Seats Forecast 2019 General Election Based on UK House Prices Momentum Analysis - 9th Dec 19
Top Tory Marginal Seats at Risk of Loss to Labour and Lib Dems - Election 2019 - 9th Dec 19
UK House Prices Momentum Tory Seats Forecast General Election 2019 - 8th Dec 19
Why Labour is Set to Lose Sheffield Seats at General Election 2019 - 8th Dec 19
Gold and Silver Opportunity Here Is As Good As It Gets - 8th Dec 19
High Yield Bond and Transports Signal Gold Buy Signal - 8th Dec 19
Gold & Silver Stocks Belie CoT Caution - 8th Dec 19
Will Labour Government Spending Bankrupt Britain? UK Debt and Deficits - 7th Dec 19
Lib Dem Fake Tory Election Leaflets - Sheffield Hallam General Election 2019 - 7th Dec 19
You Should Be Buying Gold Stocks Now - 6th Dec 19
The End of Apple Has Begun - 6th Dec 19
How Much Crude Oil Do You Unknowingly Eat? - 6th Dec 19
Labour vs Tory Manifesto Voter Bribes Impact on UK General Election Forecast - 6th Dec 19
Gold Price Forecast – Has the Recovery Finished? - 6th Dec 19
Precious Metals Ratio Charts - 6th Dec 19
Climate Emergency vs Labour Tree Felling Councils Reality - Sheffield General Election 2019 - 6th Dec 19
What Fake UK Unemployment Statistics Predict for General Election Result 2019 - 6th Dec 19
What UK CPI, RPI and REAL INFLATION Predict for General Election Result 2019 - 5th Dec 19
Supply Crunch Coming as Silver Miners Scale Back - 5th Dec 19
Gold Will Not Surpass Its 1980 Peak - 5th Dec 19
UK House Prices Most Accurate Predictor of UK General Elections - 2019 - 5th Dec 19
7 Year Cycles Can Be Powerful And Gold Just Started One - 5th Dec 19
Lib Dems Winning Election Leaflets War Against Labour - Sheffield Hallam 2019 - 5th Dec 19
Do you like to venture out? Test yourself and see what we propose for you - 5th Dec 19
Great Ways To Make Money Over Time - 5th Dec 19
Calculating Your Personal Cost If Stock, Bond and House Prices Return To Average - 4th Dec 19
Will Labour Government Plant More Tree's than Council's Like Sheffield Fell? - 4th Dec 19
What the UK Economy GDP Growth Rate Predicts for General Election 2019 - 4th Dec 19
Gold, Silver and Stock Market Big Picture: Seat Belts Tightened - 4th Dec 19
Online Presence: What You Need to Know About What Others Know About You - 4th Dec 19
New Company Tip: How To Turn Prospects into Customers with CRM Tech - 4th Dec 19
About To Relive The 2007 US Housing Market Real Estate Crash Again? - 3rd Dec 19
How Far Will Gold Reach Before the Upcoming Reversal? - 3rd Dec 19
Is The Current Stock Market Rally A True Valuation Rally or Euphoria? - 3rd Dec 19
Why Shale Oil Not Viable at $45WTI Anymore, OPEC Can Dictate Price Again - 3rd Dec 19
Lib Dem Election Dodgy Leaflets - Sheffield Hallam Battle General Election 2019 - 3rd Dec 19
Land Rover Discovery Sport Brake Pads Uneven Wear Dash Warning Message at 2mm Mark - 3rd Dec 19
The Rise and Evolution of Bitcoin - 3rd Dec 19
Virtual games and sport, which has one related to the other - 3rd Dec 19
The Narrative About Gold is Changing Again - 2nd Dec 19
Stock Market Liquidity & Volume Diminish – What Next? - 2nd Dec 19
A Complete Guide To Finding The Best CFD Broker - 2nd Dec 19
See You On The Dark Side Of The Moon - 2nd Dec 19
Will Lib Dems Win Sheffield Hallam From Labour? General Election 2019 - 2nd Dec 19
Stock Market Where Are We?  - 1st Dec 19
Will Labour's Insane Manifesto Spending Plans Bankrupt Britain? - 1st Dec 19
Labour vs Tory Manifesto Debt Fuelled Voter Bribes Impact on UK General Election - 30th Nov 19
Growing Inequality Unrest Threatens Mining Industry - 30th Nov 19
Conspiracy Theories Are Killing This Nation - 30th Nov 19
How to Clip a Budgies / Parakeets Wings, Cut / Trim Bird's Flight Feathers - 30th Nov 19
Hidden Failure of SIFI Banks - 29th Nov 19
Use the “Ferrari Pattern” to Predictably Make 431% with IPOs - 29th Nov 19
Tax-Loss Selling Drives Down Gold and Silver Junior Stock Prices - 29th Nov 19
We Are on the Brink of the Second Great Depression - 29th Nov 19
How to Spot REAL Amazon Black Friday Bargains and Avoid FAKE Sales - 29th Nov 19

Market Oracle FREE Newsletter

UK House prices predicting general election result

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

© 2005-2019 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

6 Critical Money Making Rules