Our Financial House of Cards and How to Start Replacing It With Solid Gold A credit crisis has been spreading through the economic system. It began with the collapse of the housing bubble, which was the result of years of Federal-Reserve-sponsored credit expansion. This credit expansion poured hundreds of billions of dollars into the purchase of homes largely by sub-prime borrowers who never had a realistic capability of repaying their mortgage debts in the first place. And, not surprisingly, large numbers of them in fact stopped making the payments required by their mortgages. At first apparently confined to the market for sub-prime mortgages, the credit crisis has spread to other portions of the mortgage market, to the usually staid municipal bond market, and within the last week or so has led to a run against a major investment bank (Bear Stearns).
White House and Fed divided on taxpayers bailing out banks A rift is emerging between the White House and the US Federal Reserve over whether banks should be bailed out by taxpayers, The Times has learnt. It is understood that President Bush and his advisers are concerned about the repercussions of protecting a financial institution from bankruptcy because of its own poor decisions. The White House is anxious about the long-term implications of a bank bailout and of the extension of emergency cheap credit facilities to investment firms. In what is an election year in the United States, the President is worried that Washington will be accused of using taxpayers’ money to protect executives, staff and shareholders from the consequences of poor risk management.
GDP unrevised at 0.6% in fourth quarter The U.S. economy downshifted abruptly in the fourth quarter, growing at a 0.6% annual rate, the slowest pace since late 2002, the Commerce Department estimated Thursday. The 0.6% estimate for gross domestic product, unrevised from the previous two estimates, was exactly as forecast by economists surveyed by MarketWatch. By contrast, GDP grew at a 4.9% annual rate in the third quarter. The final estimate for fourth-quarter GDP contained little that was new, aside from fresh data on corporate profits: After-tax profits from current production fell $37.9 billion, or 3.3% quarterly, to an annualized $1.11 trillion. Net cash flow fell $55.7 billion, or 4.4%.
Equity Loans as Next Round in Credit Crisis Little by little, millions of Americans surrendered equity in their homes in recent years. Lulled by good times, they borrowed — sometimes heavily — against the roofs over their heads. Now the bill is coming due. As the housing market spirals downward, home equity loans, which turn home sweet home into cash sweet cash, are becoming the next flash point in the mortgage crisis. Americans owe a staggering $1.1 trillion on home equity loans — and banks are increasingly worried they may not get some of that money back. To get it, many lenders are taking the extraordinary step of preventing some people from selling their homes or refinancing their mortgages unless they pay off all or part of their home equity loans first. In the past, when home prices were not falling, lenders did not resort to these measures.
Report Assails Auditor for Work at Failed Home Lender In a sweeping accusation against one of the country’s largest accounting firms, an investigator released a report on Wednesday that said "improper and imprudent practices" by a once high-flying mortgage company were condoned and enabled by its auditors. KPMG, one of the Big Four accounting firms, endorsed a move by New Century Financial, a failed mortgage company, to change its accounting practices in a way that allowed the lender to report a profit, rather than a loss, at the height of the housing boom, an independent report commissioned by a division of the Justice Department concluded. The result of a five-month investigation, the report is the most comprehensive and damning document that has been released about the failings of a mortgage business.
California freefall: Home prices down 26% in February Signs of distress are piling up in the California housing market, where prices are falling at three times the national rate of decline.--Statewide, median sales prices fell by a stunning 26% from year-ago levels in February, with home prices dropping at a rate of nearly $3,000 a week, the California Association of Realtors reports. Further, the CAR says the Fed's interest rate-cutting campaign "will have little near-term direct effect on the housing market."--In the San Fernando Valley, losing a home to foreclosure is now almost as common for families as buying a home. The L.A. Daily News: "During January and February, there were 1,084 foreclosures and 1,335 sales of houses and condos in Valley communities from Glendale to Calabasas, according to the San Fernando Valley Economic Research Center at California State University, Northridge."
Crude oil surges after Basra pipeline bombing The price of crude oil surged this morning after saboteurs bombed one of Iraq's main oil pipelines in what was feared to be a backlash attack by powerful Shia Muslim militias. The attack is being seen as an act of retaliation for the Government's campaign to crack down on the Shia private armies, many of them Iranian-backed, which have exerted a powerful and violent influence over the south and centre of Iraq. The explosion on the Zubair 1 pipeline, four miles south of Basra, happened on the third day of an operation by the Iraqi Army to defeat and round up gunmen in the oil port of Basra. "The pipeline was severely damaged," said an official for the Southern Oil Company.
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