[NYTr] Credit Crunch In U.S. Upends Global Markets

[All the News That Doesn't Fit]

First, some more "Yuppies in the Sky" by Tom Paxton

 Each one was wearing running shoes upon the ghostly deck
 And each one had a cotton sweater wrapped around the neck
 They all held out their credit card and tried in vain to buy
 But all the stores were shuttered to... the yuppies in the sky

 "Condos for sale...
 "Condos to buy...."
  Cried the yuppies in the sky


sent by Richard Moore (activ-l)

[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]


The Washington Post - Aug 10, 2007
http://www.washingtonpost.com/wp-dyn/content/article/2007/08/09/AR2007080900311.html

Credit Crunch In U.S. Upends Global Markets 

Fed, European Banks Add Funds as Dow Tumbles 387 

By Tomoeh Murakami Tse and David Cho 

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