U.S. Economic/Financial News
ALT-A Defaults Rising as Fast as Subprimes
The subprime mortgage meltdown is now spreading to borrowers with better credit, in the category "Alt A" between prime and subprime. "Late payments of at least 60 days and defaults on Alt A mortgages have risen about as fast as on subprime ones, to about 2.4%," Bloomberg reported March 22, quoting various bond analysts and adding: "Loans in the category made to borrowers with low credit scores, equity and documentation are doing about as badly as subprime loans, according to Citigroup Inc. and Bear Stearns analysts."
Citing the Credit Suisse Group, Bloomberg says that last year, the Alt A category accounted for about 20% of the $3 trillion of U.S. mortgages, about the same as subprime loans.
On March 19, CNN also reported on rising worries that Alt A loans could pose the next big threat to the economy, noting that "just as the Alt A market has grown even faster than the subprime, some believe it could shrink even faster."
Alt A lenders include some of the nation's largest financial institutions, such as IndyMac Corp., Countrywide Financial, GMAC, General Electric, and Washington Mutual.
Subprime Loans Mostly Unregulated
Over half of all subprime mortgages are originated by lenders with no Federal supervision, and the other lenders have minimal regulation, according to a front-page lead story in the March 22 Wall Street Journal.
Some 52% of subprime loans in 2005 were issued by mortgage brokers and stand-alone lenders with no Federal supervision; 25% were issued by finance companies owned by banks, which are technically subject to Federal Reserve supervision; and 23% are from federally regulated banks and thrift institutions. But even for those subject to Federal supervision, there is almost no Federal regulation, due to what the Journal calls the deregulatory zeal of Bush Administration appointees. To make it worse, financial institutions which are technically under the jurisdiction of Federal agencies, can't be regulated by state authorities.
Up until the 1980s, the Journal notes, virtually all mortgages were from banks and thrifts; this changed in the 1980s with the development of mortgage-backed securities, which weakenedactually eliminatedthe direct connection between lender and borrower. (A more competent history of the development of subprimes is found in last week's issue of EIR.)
Housing Starts in February Down 28.5% from February 2006
Building permits fell for the 12th time in the past 13 monthsdown 28.6% compared with a year ago, according to the Commerce Department. Permits for single-family homes fell to the lowest level since 1997.
Foreclosed Homes in Detroit: Cheaper Than New Cars
At least 16 of about 300 Detroit-area houses repossessed by banks and up for sale recently by Texas-based auction firm Hudson & Marshall, sold for $30,000 or lesslower than the price of an average new car. "The lumber in the house is worth more than that," commented the auctioneer. Among the startling examples: a four-bedroom house sold for a mere $7,000; while a bungalow on the city's west side brought a paltry $1,300. Likewise, a three-bedroom suburban house that had listed for $525,000 fetched only $130,000 at the auction. One-third of the population in this deindustrialized city officially lives in poverty, and the new foreclosure filings are the highest in the United States.
According to the realtors, prices have definitely not hit the bottom yet.
Bubble at Its Limits
Margin debt in purchasing stocks on the New York Stock Exchange rose to an all-time record in Februarybefore the stock market breakdown on Feb. 26of $295.87 billion, after January's record of $285.6 billion. Both exceeded the debt high at the peak of the so-called Internet bubble in February 2000.
A Washington Post economic column by Steven Pearlstein March 21 called the decision by the huge private-equity fund Blackstone to issue public stock to ordinary investor-suckers, "proof, if you needed any proof, that ... the bubbles in private equity, hedge funds, real estate, and credit derivatives are about to burst." Pearlstein quotes a Carlyle Group internal memo given to him, written by Carlyle executive William Conway on Jan. 31: "I know that this liquidity environment cannot go on forever.... And I know that the longer it lasts, the worse it will be when it ends."
A March 20 EIR report by John Hoefle on the potential takeover of the Dutch-based ABN Hamro Bank by British Barclays Bank, notes the incredible expansion of the assets loaned out by the biggest U.S. banks from 2004 to 2006: "In 2001, Citigroup became the first U.S. bank to break the trillion-dollar [assets] barrier, with $1,050 billion, compared to $694 billion at JPMorgan Chase and $622 billion at Bank of America. All three joined the club in 2004, led by Citigroup with $1,484 billion, JPMC with $1,157 billion, and Bank of America with $1,112 billion Since that time, Citi has grown by $400 billion (27%); B of A by $352 billion (32%); and JPMC by $194 billion, (17%)." Those three banks alone have increased the assets on their increasingly bankrupt books, by nearly $1 trillion in two years.
U.S. Hedge Funds That Once Managed $35 Billion Shut Down in 2006
U.S. hedge funds that collectively once managed $35 billion shut down in 2006, as more big firms ran into trouble, according to a survey released March 19 by industry publication Absolute Return. At least 83 nominally U.S.-based hedge fundsmany operating from the Cayman Islandsshut in 2006. The largest was the $9.1-billion multi-strategy fund run by Amaranth Advisors LLC, which ranks as the biggest hedge-fund collapse in the brief history of hedge funds.
Others that folded: Archeus Capital Management's Animi Master Fund, which oversaw $2.65 billion at its peak; another run by Sagamore Hill Capital, which once held about $2.6 billion; and Saranac Capital's Citigroup Multistrategy Arbitrage/Saranac Arbitrage fund, which topped out at $2.2 billion. Five other funds that once managed at least $1 billion also shut last year. However, these are the publicly released figures: no one knows how immense are the real losses these hedge funds created across the financial system.