WASHINGTON (AFP) - The financial hurricane tearing through Wall Street has sparked vast losses at major banks, but it has also exposed a formerly secretive corner of
Millions of Americans track the Dow Jones Industrial Average and their stock portfolios on a daily basis, but the trillion-dollar trade in mortgage-backed securities, corporate and municipal bonds and other complex securities is mostly hidden and closed to amateur investors.
Mounting losses on mortgage securities have affected other complex debt instruments and deepened a credit crunch that has reverberated around the world.
"The subprime problem spread to the banks and from the banks it has now spread to the credit markets and it has become a vicious cycle," said John Praveen, the chief investment strategist for Prudential International Investment Advisers, LLC.
The credit squeeze was triggered by a sharp rise in subprime mortgage defaults, or home loans granted to Americans with poor credit, because banks had bundled and resold subprime loans to other parties.
The angst worsened Friday as Bear Stearns, a large
Bear Stearns chief executive Alan Schwartz said the bank's liquidity had "signficantly deteriorated" in just 24 hours as it battled to stem losses linked to mortgage-backed securities.
Cracks first began appearing in the credit markets in mid-2007 when financial firms revealed they were slashing the value of their mortgage portfolios due to the
The resulting losses forced some of
Debt became toxic and cash became king as the banks turned off lending spigots that had fueled a boom in corporate mergers and acquisitions.
The liquidity squeeze has deepened in recent months as private-equity firms and hedge funds, which had borrowed heavily, sought to sell investments, but struggled to find purchasers.
An affiliate of the Carlyle Group, a giant
US President George W. Bush and the Federal Reserve have backed various measures, including sustained interest rate cuts, to ease the credit crunch, but it shows no sign of abating.
Treasury Secretary Henry Paulson, Fed chairman Ben Bernanke and Securities and Exchange Commission (SEC) chairman Christopher Cox urged banks, credit rating agencies and mortgage firms, to overhaul their practices Thursday.
The financial chiefs endorsed a range of recommendations aimed at boosting business transparency and restoring confidence in
The intensifying credit turmoil is threatening some public works projects and is making it harder for firms to get business loans and for students to obtain loans for university courses.
The director of the SEC's division of trading and markets, Erik Sirri, told Congress last week that the contagion had spread to municipal bond auctions.
"There is no question that the recent dislocations in the municipal bond markets have created unanticipated hardships for municipal issuers and in some cases dramatically increased their borrowing costs," Sirri said.
If US cities and states cannot sell municipal bonds to investors it could threaten plans to build new roads, schools, airports and other public works projects.
The state of
Veteran money managers say the escalating credit crisis is one of the worst they have witnessed in recent decades and could push the economy into a recession.
Praveen said economic growth will likely rebound in the third quarter due to a 168-billion-dollar government economic stimulus package, but he said consumers will need to keep spending to keep the economy on its legs.
As the British economist John Maynard Keynes once said: "The market can stay irrational longer than you can stay solvent."