By Gaurav Bhola, MSM, Managing Editor
Monday, August 13, 2007
The mortgage contagion has spread like wildfire, infecting the global markets. In recent months the mortgage whirlwind has been gathering strength on terra-U.S., no longer able to be contained, the mortgage whirlwind has departed U.S. shores, on its path to engulf markets worldwide. The U.S. stock markets in recent months have been going up and down like an elevator, but now the market has hit the ground floor. On Thursday, France’s biggest bank, BNP Paribas froze funds in the amount $2.2 billion, referencing the U.S. subprime home loan market as a reason.
The bank has $446 billion in assets under management; the frozen funds represent 0.5 percent of those assets. However, like the two Bears Stearns funds in the U.S., BNP’s has had three funds decline in value. To maintain the funds’ liquidity, BNP has blocked investors from redeeming their investments in those funds.
Irrespective of BNP Paribas the assets’ credit rating or quality, the dissipating liquidity in the U.S. mortgage security market is creating panic among investors. This panic has led to investors cashing in on their mortgage related securities investments.
Due to the subprime fallout it has become difficult for banks and fund managers to calculate net asset value and other assets fairly, despite of the assets’ credit rating or quality. Many funds heavily invested in risky mortgages have already closed or have declined abysmally in value, although valuation of some funds may resume after liquidity has returned to the market. Otherwise, in the absence of liquidity the global stock market eruptions and ensuing lava flows will envelope and melt economies worldwide.
The sharp decline of U.S. stocks on Thursday rekindled fears about the mortgage sector, credit markets, and market liquidity. The loose lending standards of mortgage lenders in the last few years have created an economical problem of extreme magnitude. In the real estate market boom, mortgage lenders approved everybody and anybody for home loans, regardless of credit worthiness. Now many mortgage loan borrowers have defaulted on those loans, even borrowers with good credit.
Consequently, rising home loan defaults have forced those same mortgage lenders and mortgage brokers to tighten their lending standards, making it more difficult to get a mortgage. Herein, the combination of stricter lending, rising foreclosures, excess home inventory, and scared investors have exacerbated an already precarious financial market and pushed it over the precipice.
The current message of the stock markets is that there are significantly more problems arising out of the mortgage sector than had been forecasted by the Federal Reserve, Wall Street analysts, and economists. The impending meltdown was thought to have been contained a few months ago, as experts predicted the pick-up in home sales and the economy early next year. But with the Dow slipping 2.8%, S&P 500 falling 3.0%, and the Nasdaq down 2.2%, it will be interesting to watch how the market reacts to the Fed’s infusion of $38 billion into the banking system.
