On Sunday, the Financial Times of London predicted "a nervous start to the week following the plunge in stocks in the U.S. on Friday as concerns mounted about fallout from the U.S. mortgage market turmoil."[1]  --  Stocks plunged when the CFO of Bear Stearns expressed pessimism about credit markets, and David Wighton said that "[s]ome observers said investors had overreacted to Bear Stearns' comments on Friday, particularly the chief financial officer ruling out share buy-backs to preserve 'liquidity.'"  --  "One analyst said that if Bear made no statement before the markets opened on Monday investors would fear there was 'more bad news to come.'"  --  "U.S. financial stocks were particularly badly hit on Friday, prompting calls for the Federal Reserve to intervene by cutting interest rates," Wighton said.  --  But Lex said this would happen only "if there is a real economic spillover."[2]  --  "Ben Bernanke, chairman of the Federal Reserve, has made pretty clear in the past that he does not plan to ride in with interest rate cuts to save the markets from themselves.  Instead the Fed will take its decisions based on the economic data."  --  In reporting on U.S. equity markets on Friday, the Financial Times noted that "Bear Stearns shares fell 6.3 per cent to $108.35 after S&P revised its outlook on the company to negative from stable.  American Home Mortgage said it would shut down after lenders cut its credit lines.  The closure will result in the loss of almost 7,000 jobs.  Countrywide Financial said in a statement late on Thursday that it was not threatened by the recent lending collapse.  Countrywide said it had nearly $50bn in 'highly-reliable short-term funding liquidity' available.  But its shares still fell 6.6 per cent to $25."[3]  --  On the extraordinary collapse of American Home Mortgage, AP said that its CEO "Michael Strauss said in a statement that 'market conditions in both the secondary mortgage market as well as the national real estate market have deteriorated to the point that we have no realistic alternative.'  American Home Mortgage's lenders were balking because the mortgage loans that act as collateral for the company's credit lines have sunk in value.  The market where investors buy mortgage loans has suffered 'unprecedented disruption' this year, the company said, and it was having trouble selling its mortgages."[4]  --  Frank Eltman called AHM the "latest casualty of subprime saga," but Mike Caggeso of Money Morning said on Monday that "American Home Mortgage Investment wasn’t a subprime lender."[5]  --  Subprime lenders make loans to people with poor credit, but AHM made loans to "borrowers who could not document their income or assets."  --  Caggeso explained how efforts to solve this credit crisis could cause a larger collapse:  "Many [subprime lenders in poor condition] will have to take out loans until they get their finances in order.  Given the risky nature of this situation, lenders will ratchet up the interest rates they charge to account for the added risk.  If those loans end up in default, too — the corporate equivalent of the subprime deals that sank consumers — it could start a second wave of defaults, but this time in the corporate lending market."  --  BACKGROUND:  Kevin Phillips wrote last year that the so-called FIRE sector (finance, insurance, and real estate) is now the "new dominant economic sector in the U.S." (American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21st Century [New York: Viking, 2006], pp. 265-68).  --  Until the 1980s the U.S. government limited serious borrowing to major wars, but in the 1980s the U.S. embraced debt as an economic engine, without attention to its historic noxiousness for older nations.  The Reagan-Bush-Clinton era's celebration of consumerism, stock-market booms, and borrowing contributed to the formation of the mamomth "twin deficits" — the federal budget deficit and the current-account deficit.  --  In an effort to keep the economy afloat after Sept. 11, Fed Chairman Alan Greenspan cut interest rates, confirming the government's commitment to what Phillips calls "financialization" as a national economic strategy and leading to a boom in real estate.  --  A "credit-industrial complex" emerged, vastly increasing income inequality.  --  For Phillips, these developments are part of a reversal of traditional American attitudes, seen also in increased borrowing, the petrodollar system, permissiveness and deregulation, the creation of a culture of overconsumption, a steep rise in household indebtedness, and a surge in middle-class bankruptcies — the triumph of a market-idolizing "conservatism" that is anything but conservative over the traditional conservative awareness of greed and the lessons of history.  --  The result:  a vast credit bubble, that by many accounts is now bursting.  --  Historically, Phillips points out, every nation finds a reason for believing history's generalizations do not apply to it.  --  The rentier mentality in later years of a nation relies on a hubris that derives from past successes, and although American élites perceive the ascendancy of finance as progress, Phillips believes it leads to vulnerability.  --  Moreover, a collapse of U.S. credit markets would affect the global economy, since American households are now sufficiently indentured to impact the world economy should the housing bubble burst (ibid., pp. 324-29).  --  At some point the U.S. will face what Phillips calls the "grave but enigmatic" implications of having most U.S. debt held by foreigners.  --  In his view, the present situation has no historical precedent.  --  Ultimately what happens may be viewed by historians as a consequence of the U.S.'s hubristic unilateralist response to Sept. 11:  "great wars have been grim reapers of international hegemonies" (ibid., p. 340; see also pp. 339-43).  --  Ironically, it is the supposedly conservative Republican party that has facilitated U.S. oil vulnerability, excessive indebtedness, and indulgence of radical religion and in the process become "a vehicle of special interests that have become entrenched in crippling constituencies and biases," Phillips says (ibid., p. 348).  --  The petrodollar system has been weakened by the failure of the U.S. invasion of Iraq with respect to oil supplies and the decline of the dollar vis-à-vis the euro.  --  What will the U.S. do, faced with a crisis?  --  "As in so many critical arenas, the U.S. government had no clear strategy," Phillips writes (ibid., pp. 349-52).  --  U.S. finance is, in the words of investment strategist Raymond T. Dalio, "substantially dependent" on foreign borrowing (ibid., pp. 358-63).  --  Phillips's book, published in January 2006, called attention to the potential danger of unregulated credit derivatives and hedge funds, exotic, speculative forms of finance in housing, mortgage, and credit-card markets, all of which have given rise to trepidation about an enormous credit bubble whose bursting could yoke middle-class debtors to quasi-indentured status (ibid., pp. 377-78).  --  Historically, such an event could undermine world stability, begin to bring an end to the era of U.S. global dominance, and ultimately produce Asian, especially Chinese, ascendancy....

1.

Companies

Financial services

STOCKS FACE NERVOUS START TO WEEK
By David Wighton

Financial Times (UK)
August 5, 2007

http://www.ft.com/cms/s/eb4c3160-437e-11dc-a065-0000779fd2ac.html

World markets face a nervous start to the week following the plunge in stocks in the U.S. on Friday as concerns mounted about fallout from the U.S. mortgage market turmoil.

The late sell-off in New York followed comments by the chief financial officer of Bear Stearns, who said credit markets were as bad as he had seen in 22 years.

The Wall Street bank's board is reported to be meeting on Monday to consider the future of Warren Spector, its co-president and head of capital markets. One analyst said that if Bear made no statement before the markets opened on Monday investors would fear there was "more bad news to come."

U.S. financial stocks were particularly badly hit on Friday, prompting calls for the Federal Reserve to intervene by cutting interest rates. At its meeting on Tuesday, some economists expect the Fed to acknowledge the risk that weakness in the U.S. housing market could spread to the broader economy.

The Fed is expected to leave rates unchanged but U.S. Treasury yields tumbled on Friday as the futures market priced in a strong chance of two cuts in the Fed Funds rate by the end of the year.

Investors will be looking nervously for more corporate victims of the slump in U.S. subprime mortgage securities caused by increasing late payments on home loans.

In a statement to be released on Monday, Natixis, the French investment bank whose shares fell almost 10 per cent on Friday, is expected to seek to ease concerns about its exposure to U.S. mortgages by reiterating its full-year profits guidance.

Natixis has a small stake in IKB, the German bank bailed out by the government last week after suffering losses on U.S. subprime loans.

Some observers said investors had overreacted to Bear Stearns' comments on Friday, particularly the chief financial officer ruling out share buy-backs to preserve "liquidity."

The turmoil in the credit markets was partly triggered by the collapse six weeks ago of two mortgage hedge funds run by Bear Stearns. Mr. Spector, seen as the most likely successor to Jimmy Cayne, Bear's chairman and chief executive, was also responsible for the asset management arm that ran the funds.

2.

Lex

THE FED AND MARKETS

Financial Times (UK)
August 5, 2007

http://www.ft.com/cms/s/a3e75c48-4372-11dc-a065-0000779fd2ac.html (subscribers only)

Those hoping that the “Greenspan put” lives on in his successor are likely to be disappointed. Ben Bernanke, chairman of the Federal Reserve, has made pretty clear in the past that he does not plan to ride in with interest rate cuts to save the markets from themselves. Instead the Fed will take its decisions based on the economic data.

Recent turmoil in the credit markets, which stemmed from problems with subprime mortgages and has caused serious stock market jitters, is therefore unlikely to get Mr. Bernanke pulling the trigger. But he will be watching very closely to see if there is a real economic spillover. That is a particular risk, given that most of the pain so far has been in credit. There is a possibility that much tighter lending standards to high-risk consumers and companies will also sustainably raise the cost of regular borrowing, helping to slow an economy that is already expected to grow at a disappointing pace in the second half of the year.

No wonder the futures markets are suddenly pricing in at least one interest rate cut by the end of the year. Recent data have given the Fed slightly more room for maneuver. The labor market has softened a little, with the unemployment rate ticking up to 4.6 per cent and weak job creation figures. Meanwhile, the rise in the core personal consumption expenditures index, the Fed’s preferred measure of inflation, has finally fallen back below 2 per cent, the top of its target range.

On top of that, news from the housing market has continued to worsen rather than stabilize, as many hoped. That could continue as mortgage rates for less credit worthy borrowers have risen. Even for prime borrowers rates have not fallen in line with Treasury yields in recent weeks.

A cut in short-term interest rates this year is not yet a foregone conclusion. But the Fed can expect to be back center-stage, starting from this week when all eyes will be focused on any comments it makes about the impact of rollercoaster markets on the economy.

3.

WALL ST. STOCKS DIVE ON JOBS DATA
By Anuh Gangahar

Financial Times (UK)
August 3, 2007

http://www.ft.com/cms/s/9dfddb58-41c0-11dc-8328-0000779fd2ac.html

U.S. stocks plunged Friday as traders endured another choppy trading session after the government’s monthly job report came in slightly weaker than expected.

Non-farm payrolls increased just 92,000 in July, down from 126,000 in June and 188,000 in May, the Labor Department said. Previous reports showed job growth of 132,000 in June and 190,000 in May. Monthly job growth has averaged 136,000 this year.

The unemployment rate rose 0.1 percentage point to 4.6 per cent.

The Dow Jones Industrial Average fell 281.42, or 2.09 per cent, to 13,181.91. The S&P 500 index dropped 39.14, or 2.66 per cent, to 1,433.06, and the Nasdaq Composite index fell 64.73, or 2.51 per cent, to 2,511.25.

The closely-followed report comes ahead of Tuesday’s meeting of policymakers at the Federal Reserve.

Most analysts agree the central bank will leave rates unaltered at the meeting. But some have raised expectation of a possible rate cut later this year due to continuing problems in the US credit market.

Bear Stearns shares fell 6.3 per cent to $108.35 after S&P revised its outlook on the company to negative from stable.

American Home Mortgage said it would shut down after lenders cut its credit lines. The closure will result in the loss of almost 7,000 jobs.

Countrywide Financial said in a statement late on Thursday that it was not threatened by the recent lending collapse. Countrywide said it had nearly $50bn in ”highly-reliable short-term funding liquidity” available. But its shares still fell 6.6 per cent to $25.

In other corporate news, Take-Two Interactive Software warned after the closing bell on Thursday that it would delay its most important upcoming video game and that it would post a full-year loss. Shares plunged 16.26 per cent to $14.16.

Procter & Gamble reported a 19 per cent increase in its fiscal fourth-quarter profits, the company said on Friday. The company earned $2.27bn, or 67 cents a share, up from $1.9bn, or 55 cents a share, in the year-ago period. P&G also said it would ramp up its share buyback programme. Its shares were down 0.66 per cent at $62.88.

4.

Business

AMERICAN HOME TELLS MOST OF ITS WORKERS GOODBYE
By Frank Eltman

** Latest casualty of subprime saga is out of money **

Associated Press
August 3, 2007

http://www.washingtonpost.com/wp-dyn/content/article/2007/08/03/AR2007080301897.html

MELVILLE, N.Y. -- Some companies fade away over time. American Home Mortgage Investment Corp. is disappearing right before its 7,000 employees' eyes. The latest victim of the subprime mortgage implosion has run out of money, and now its workers have run out of time.

"I thought it was like a dream," said Saikumar Bullachi as he left the company's Long Island headquarters Friday morning for the last time. "Suddenly, you know, somebody wakes you up and says it's all over now."

American Home Mortgage, which has been struggling to raise money to make new loans, stunned its work force this week by announcing its financial backers have essentially pulled the plug and all but a fraction -- or 750 -- of the staff was let go. The unemployed include the 1,400 workers at its Long Island headquarters.

The Wall Street banks that lend American Home Mortgage money for home loans will not extend the company any more money, and some have demanded a return of money already lent.

American Home Chief Executive Michael Strauss said in a statement that "market conditions in both the secondary mortgage market as well as the national real estate market have deteriorated to the point that we have no realistic alternative."

American Home Mortgage's lenders were balking because the mortgage loans that act as collateral for the company's credit lines have sunk in value. The market where investors buy mortgage loans has suffered "unprecedented disruption" this year, the company said, and it was having trouble selling its mortgages.

"We were in risk management so we kind of saw everything coming," said analyst Jonathan Blumberg, who was racing for a train to his Brooklyn home after leaving work. "It's tough to say" what the industry's immediate future holds, he added.

But it appeared that some employees might not be out of work for long.

As they carried file folders and other items to their cars, they were greeted by fliers on their windshields advertising job openings, including one with a local law firm.

On another side of the parking lot, a man who identified himself as Manny Mosquera of Union America Mortgage in Mineola hopped out of a stretch limousine to say that his company had openings for some of the American Home alumni.

"The bottom line is people still have to buy homes, people still have to refinance their house," he said. "That's not changing, that's never going to change.

"We're trying to help some people out, find them some employment, simple as that."

5.

AMERICAN HOME MORTGAGE IS THE FIRST DOMINO TO FALL IN NON-SUBPRIME MARKET
By Mike Cagesso

Money Morning
August 6, 2007

http://www.moneymorning.com/2007/08/06/american_home_mortgage/

American Home Mortgage Investment Corp. announced Friday that it was closing its doors, heightening fears that we’ve only seen the start of the U.S. credit market shakeout.

Almost 6,250 employees lost their jobs, leaving about 700 people to collect unsettled bills for the Melville, N.Y.-based lender. American Home Mortgage Investment will likely seek for bankruptcy protection this week.

“Unfortunately, the market conditions in both the secondary mortgage market as well as the national real estate market have deteriorated to the point that we have no realistic alternative,” American Home Chief Executive Officer Michael Strauss said with the company’s announcement.

It isn’t the only mortgage and loan company that is having a hard time paying off its own debt. New Century Financial Corp. has sought bankruptcy protection. Accredited Home Lenders Holding Co. is also struggling to tread water while the subprime mortgage market continues to drown.

Other lenders are holding their ground by raising rates and/or lopping off higher-risk loan services. Wells Fargo & Co. and Wachovia Corp. are both raising rates. AmTrust Financial Corp. announced it stopped granting loans that exceed 95% of a home’s value. First Horizon raised rates on Alt-A and jumbo loans in the past two weeks, Bloomberg News reported.

So how did the dominos start falling? Credit problems initially struck the so-called “subprime” lenders, the bankers who provide high-interest loans to people with poor credit. On top of that, the slow real estate dampened the number of loans taken. American Home Mortgage Investment wasn’t a subprime lender, but it made many loans to borrowers who could not document their income or assets.

How other subprime lenders in poor condition stay alive could be an interesting and potentially dangerous paradox. Many will have to take out loans until they get their finances in order. Given the risky nature of this situation, lenders will ratchet up the interest rates they charge to account for the added risk. If those loans end up in default, too – the corporate equivalent of the subprime deals that sank consumers –- it could start a second wave of defaults, but this time in the corporate lending market.