The Credit Mess
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 Posted: Thu, Aug 2 2007, 8:39 am EDT Post subject: The Pain Moves Beyond Subprime |
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The Pain Moves Beyond Subprime
The debt and leveraged-buyout markets have stalled, and more trouble lies ahead
by Matthew Goldstein and David Henry
The flu in the financial sector has sapped the U.S. stock market of more than $200 billion since the start of the year. The question on investors' minds is: How far will it spread?
On July 31 the stock market resumed a downdraft that had begun a week earlier, and once again bad news from a financial company triggered the sell-off. Shares of American Home Mortgage Investment (AHM) plunged 88% after the Melville (N.Y.) lender to homeowners with decent credit histories warned that it's facing serious liquidity issues and may be forced to close. For the year, the widely followed KBW Bank Index of the 24 largest lenders has fallen 10%, caused mostly by the meltdown in the subprime mortgage industry. And because financial shares make up 20% of the Standard & Poor's 500-stock index—its biggest component—the pain has spread. Without them, the S&P would have been up 5.6% in 2007 through July instead of the 2.6% it logged.
Yet as challenging as conditions have gotten for financial-services firms, signs point to even more trouble in the months ahead—trouble that may continue to weigh on the broader equity market.
Financing at Risk
Subprime woes have moved far beyond the mortgage industry. Already, at least five hedge funds have blown up. The latest worry is that a recent slump in the markets for corporate loans and junk bonds will deepen, jeopardizing the financing of leveraged buyouts, a big profit driver for investment banks. What's more, fears are growing that banks may be on the hook for some of the $300 billion in loan commitments they've made for buyouts already in the pipeline. The mood has gone so somber that derivatives traders are betting that bonds issued by major investment banks will tumble to near junk territory. Goldman Sachs Group (GS) and Lehman Brothers (LEH) are being seen as no more creditworthy than casino operator Caesars Entertainment, according to an analysis of derivatives trades by Moody's Credit Strategies Group.
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http://www.businessweek.com/investor/content/aug2007/pi2007081_127444.htm |
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