U.S. News

Markets Roiled Again By Worries About Credit Crunch


Financial markets were roiled again on Friday amid growing signs that the subprime mortgage problem may be far more widespread than anyone thought.

Though stocks ended the day little changed, most experts think investors should be prepared for more nervous days ahead.

"I don't know that anybody knows where the bottom of this thing is," said Larry Levin, president of SecretsofTraders.com. "The only things that are moving the market right now are these subprime and credit headlines and something that the Fed might possibly do."

Among the latest developments:

--The Federal Reserve added $38 billion to the financial system on Friday as the scramble for cash pushed up short-term lending rates. Although the first two injections seemed to calm the markets, the third renewed jitters about the credit crunch.

--U.S. regulators have begun going over the books of some top Wall Street brokers and investment banks for subprime-mortgage losses, the Wall Street Journal reported.

--Big mortgage lenders got pummeled as investors received fresh reminders that a shortage of liquidity might crimp profits.

--The U.S. economy could slow further because of tighter credit, broad deterioration in the housing market and skittish consumer spending, a closely watched forecast by U.S. economists says.

Fed Adds Liquidity

Liquid Injection

The Federal Reserve, trying to calm financial turmoil on Wall Street, added funds three times to the financial system on Friday for a total of $38 billion.

The added liquidity was the largest since the days after the September 11 attacks six years ago. It also was on top of the $24 billion the Fed added on Thursday.

The Fed also took the unusual step of making a rare statement after the first operation -- the first time it's done so since the September 11, 2001, terror attacks -- in an effort to calm investors' fears.

Before Wall Street's opening bell, the Fed infused $19 billion in a market operation that was conducted more than an hour before its usual time.

By mid afternoon, the Fed conducted two more cash injections -- $16 billion and $3 billion -- a highly unusual but not unprecedented occurrence for a Friday.

U.S. stock indexes sharply cut their morning losses after the Fed's second liquidity injection but losses accelerated after the third injection.

In its statement after Friday's first market operation, the Fed said it would provide liquidity as needed "to facilitate the orderly functioning of financial markets.

Probe of Wall Street Firms

The Right Move

The Securities and Exchange Commission is reviewing whether Wall Street firms are calculating the value of their subprime-mortgage assets consistently, the Journal said, citing people familiar with the inquiry.

The regulatory checks are expected to include Wall Street's five biggest investment banks, including Goldman Sachs and Merrill Lynch. So far, few of Wall Street's big firms have disclosed any significant subprime losses even though the meltdown in the mortgage market has caused market turmoil, the Journal said.

Both analysts and investors have raised questions over whether there are unreported subprime-mortgage and collateralized-debt obligation losses lurking on firms' books. Added scrutiny may also help pinpoint whether hedge funds have accurately reported their results to investors, the Journal said.

Marking subprime assets to market is troublesome since they aren't easily bought or sold, making it tricky to put an accurate price on them, the Journal reported.

Ann Rutledge, a principal with R&R Consulting, a structured finance consultancy in New York, told the Journal: "No one really knows how to price asset-backed securities and CDOs and that's a real problem in the market now."

Big Lenders Troubled

Countrywide Financialled shares of U.S. mortgage companies lower on Friday as investors received fresh reminders that a shortage of liquidity might crimp profits.

Shares of Countrywide fell as much as 13.7 percent after the largest U.S. mortgage lender said in a regulatory filing that it was facing "unprecedented disruptions" in the market to buy and sell home loans, and that the ultimate impact was unknown.

Washington Mutual, the largest U.S. savings and loan, said in a separate filing that market liquidity had "diminished significantly," and that it would be "adversely affected" while this persisted. Its shares fell as much as 5.6 percent.

Decliners included MGIC Investment , which fell as much as 19.8 percent after a JPMorgan Chase analyst downgraded the mortgage insurer to "underweight" from "overweight."

Two mortgage investors also suffered large declines. Anworth Mortgage Asset slid as much as 25.1 percent after a unit received a default notice, and Thornburg Mortgage , which also makes loans, fell as much as 18.5 percent after two credit agencies downgraded its ratings deeper into "junk" status."

Economy Seen Slowing

The consensus forecast of 50 top economists surveyed between Aug. 1-2 in the Blue Chip Economic Indicators report called for anemic growth in gross domestic product, or GDP, of 2.0% this year and 2.8% in 2008.

That was down from their forecast a month earlier of 2.1% in 2007 and 2.9% in 2008.

"Rising concern about contagion from the meltdown in the subprime mortgage market has now produced a more generalized repricing of risk," the Blue Chip Economic Indicators newsletter said.

There was some division among the economists polled but the bulk of them agreed that if the financial markets fail to stabilize soon, the economy would slow even further.

"Distress among home loan originators has grown acute and many non-depository lenders have sharply curtailed their lending or gone out of business," the newsletter said.