NEW YORK: The US bad-loan crisis swept global markets to wide losses on Wednesday as it tainted the earnings of some of America’s best-known companies and sparked moves in Washington to fight a spreading financial epidemic.
Asian and European investors overnight dumped stocks and bought safe government bonds on fears of deepening troubles in US housing loans known as “subprimes,” which triggered a record number of home loans entering foreclosure at the end of last year.
Tokyo’s Nikkei fell 2.9%, its second biggest daily percentage fall this year, while European markets lost 1% to 2%.
In volatile trading, Wall Street attempted to rally from its 2% decline on Tuesday, though it encountered heavy selling at midday and the Dow briefly dropped below 1,200 for the first time since November.
Leading to weakness was a report that No. 1 global carmaker General Motors Corp.’s profit was hurt by a massive loss on bad housing loans in its housing unit, even as its struggling auto unit turned a profit. Another corporate icon, tax preparer H & R Block Inc., also suffered subprime woes as it took a loss of $29 million to account for its mortgage unit, OptionOne, that it is trying to sell off.
The fear in markets was that a further deterioration in home values, brought on by foreclosures, could put a serious drag on an American economy that has been pumped up by pricey real estate for nearly a decade.
“If the U.S. subprime mortgage problems get worse, it could begin to hurt US consumers, and that would be very hurtful for exporters,” said Kim Yung-min, a fund manager at SH Asset Management in Seoul, explaining the weakness of Asia’s markets. “This month could be very bad.”
Regulators and members of Congress poring over the rubble of the fast-deteriorating mortgage crackup began to cast doubt on the quality of oversight given to bankers, who routinely gave out home loans with no money down and scant documentation.
US Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said on Wednesday that he was “angry” that regulators have fallen down on the job and that government officials “bear some responsibility for responding to how we got to this point.”
The riskiest segment of the US mortgage market, which serves borrowers with poor credit histories at high interest rates, has seen rising default rates in recent months amid falling prices and slower sales in the housing market. At least 20 lenders in the subprime mortgage sector have gone out of business as a result.
The loans issued by the mortgage concerns were widely sold as securities to investors around the world, in a fashion that regulators have long argued would reduce risk by spreading it out. But as global markets became increasingly volatile this week, risk aversion has undermined investors’ overall confidence.
“It is impossible for there to be significant issues in one area of our capital markets that don’t wash over more generally to the rest,” Securities and Exchange Chairman Christopher Cox said in comments to reporters during a US Chamber of Commerce meeting.
There were few specifics from Washington about how to stanch the bleeding from the mortgage failures after Dodd said on Monday that a rescue package may be required for borrowers. As many as 1.5 million Americans could lose their homes as the subprime market shakes out, the National Community Reinvestment Coalition said, calling on Congress to act immediately to aid subprime borrowers.
“As this crisis worsens, mortgage tsunamis will ravage working-class neighbourhoods across this country,” the consumer group’s president, John Taylor, said in a statement.
An analyst at Moody’s Investors Service, which rates the credit of bond issues and saw its own stock slammed this week, said the subprime crisis could also put a long-term chill into the global investment community.
“One wonders whether the stress being experienced in the subprime mortgage market is the bell ringing out the era of the incredible shrinking credit risk spread and the monsoon of liquidity,” said John Kriz, managing director of real estate finance at the ratings agency.
His remark echoed that of Countrywide Financial chief executive Frank Mozillo on CNBC saying the subprime crisis “is becoming a liquidity crisis.”
But the action in other markets countered the point, as bonds globally surged on the view that the U.S. Federal Reserve and other central banks will keep supplying credit where needed.
The fall in bond yields has filtered quickly into the consumer lending market, where rates fell to the lowest since early December. The Mortgage Bankers Association said mortgage application activity hit its highest level since 8 December.
“People are flapping about the subprime market but it was not helped by Countrywide Financial, one of the biggest quality lenders above subprime status, saying we have a credit crunch,” said a bond trader in London.