From Volume 6, Issue 19 of EIR Online, Published May 8, 2007

U.S. Economic/Financial News

Massive Losses in Mortgage-Backed Securities

May 4 (EIRNS)—Reuters reported today that, beginning in the last week of April, the major credit ratings agencies such as Standard and Poor's and Moody's started downgrading mortgage-backed securities (MBS)—a crack in the ratings wall which has been holding back reporting of real losses in MBS, which could rise to hundreds of billions dollars due to the U.S. housing bubble collapse. So far, only $1 billion in bonds issued in 2006 have been downgraded by the reluctant raters, who have been standing between MBS holders and the need to report large losses known to have broken out in the MBS markets.

That's $1 billion out of $36 billion in the worst kind of subprime-based securities—"second lien" mortgages—and out of $483 billion of MBS created last year alone. Moody's has cut 30 issues of 2006 MBS from investment grade to junk, and is reviewing 81 more; S&P has downgraded 43 issues to junk and is reviewing 60 more.

"It's unusual to see downgrades in subprime deals so soon after they were issued," said a Credit Suisse analyst quoted in the May 4 Wall Street Journal. "This is not a normal phenomenon and is a cause of concern." An executive from a New York hedge fund is also quoted: "It's embarrassing for a ratings company to downgrade bonds so quickly" after the bonds were issued. "It reflects poorly on all parties in the underwriting process and their judgment of the credit-worthiness of the bonds."

The ratings companies are still claiming that 90% of the MBS based on subprime mortgages won't require downgrade—indicating how far the process has yet to go. Even the most conservative investment bank estimates put the MBS losses at over $20 billion already. GM's finance arm has lost nearly $2 billion over six months; UBS bank in Switzerland just had to close down its hedge fund due to heavy MBS losses.

An S&P report on the U.S. residential real estate sector, sent to subscribers on April 30, says that "the sector is now about one and a half years into what ... may be a roughly three-year downturn," according to Reuters. This means, for example, that S&P expects to downgrade more than a third of all U.S. homebuilding companies, essentially all of those which have gone heavily into building homes purchased by subprime mortgages. As for the others, the "prime builders," the largest five all reported losses in the first quarter of 2007, and S&P warned on April 24 that these builders' negative cash flow created the potential that their lenders may "foreclose," calling in their credit.

Cancellations Driving Homebuilders' Losses

May 4 (EIRNS)—Hovnanian, the sixth-largest U.S. homebuilder, had far greater losses in the second quarter than expected, due to "exceptionally high cancellations" in the Fort Meyers area of Florida. Bloomberg reports that such cancellations are becoming rampant across the industry, as values decline, and speculators recognize that they will lose less by dumping their down payments, than holding on to the contracts. The Wall Street Journal today quotes Hovnanian's CFO, Larry Sorsby, whining that many buyers are suing to get out of their contracts, based on claims that they were misled by Hovnanian or others. "Ambulance-chaser lawyers" now have placed ads in Palm Beach media: "Your contract for the purchase of a new house or condo may be illegal—To see if you are entitled to a refund, call today...."

Cheney's Banker 'Spills the Beans': Bubble About To Burst

May 3 (EIRNS)—The Boston banker who has been managing Vice President Dick Cheney's $6.1 million, has issued a quarterly newsletter describing the entire world financial system as a bubble ready to pop. Under the title "The First Truly Global Bubble," Jeremy Grantham of Grantham, Mayo, Van Otterloo & Co. maintains the bursting of this bubble, Grantham says, "will be across all countries and all assets, with the probable exception of high-grade bonds.... Since no similar global event has occurred before, the stresses to the system are likely to be unexpected."

Grantham attacks the energy policies of Cheney's White House Energy Task Force, according to Bloomberg News, which spoke with him. The news service notes that this Boston banker donated $23 million to Imperial College London, to establish an institute on climate change.

GMAC 2007 Mortgage Losses: $1 Billion ... and Counting

May 3 (EIRNS)—Some investment banks' estimates of $20 billion in total losses in the mortgage-backed securities (MBS) markets, have now been exposed as far too low; one major firm alone lost nearly $1 billion in just the first quarter of 2007.

The three top credit-rating agencies have all downgraded their outlooks for Residential Capital (ResCap, part of General Motors Acceptance Corporation or GMAC) to "negative," after the Bloomington, Minnesota mortgage company acknowledged its mortgage losses on May 2, according to the Minneapolis Star-Tribune. ResCap lost $910 million, and is laying off 1,000 employees. GMAC, which used to be the financial engine pulling up GM's auto operations, is now transformed by the mortgage collapse into a big money-loser, half-owned by GM and half by the huge Cerberus hedge fund.

All rights reserved © 2007 EIRNS