NUVENS NEGRAS

Fears About Economy Increase
Debt Crisis Grows; Top Mortgage Firm Sold at a Bargain

By Anthony Faiola and Tomoeh Murakami Tse

http://www.washingtonpost.com/wp-dyn/content/article/2008/01/11/AR2008011103959.html

Major banks and mortgage companies yesterday sharply accelerated an industry consolidation that is set to change the landscape of American lending, while a convergence of events exposed fresh worries about the U.S. economy.
New indications emerged yesterday that the spiraling subprime mortgage crisis is spreading from home loans to credit cards, potentially engulfing a far broader segment of Americans. At the same time, the U.S. trade deficit soared to a 14-month high, fueled by soaring oil prices.
And rising concern that U.S. investment houses, particularly Merrill Lynch, may yet suffer far greater losses, helped set up a wide market sell-off.
Echoing the heightened concern, Treasury Secretary Henry M. Paulson Jr. said yesterday that the U.S. economy had slowed "rather materially" at the end of 2007 and that "time is of the essence" in launching an economic stimulus package to stave off a recession.
Meanwhile, a broad shake-up of the U.S. lending industry is speeding up. Bank of America agreed yesterday to buy the troubled Countrywide Financial for $4 billion, a bargain-basement price for the nation's largest mortgage lender, which, analysts said, could have even more substantial mortgage-related losses ahead.
"There are signs" that the economy "is slowing down fairly rapidly," Paulson told Bloomberg Television. Congressional Democrats have promised to work with the Bush administration to pass a series of economic measures meant to boost consumer confidence and fend off a sharp downturn, perhaps including tax rebates for low- and middle-income Americans and tax cuts and other fiscal measures to boost investment. "If something were to be done here, I think the focus would be on something that's temporary and that could get done and make a difference soon," Paulson said.
Some saw the rescuing of Countrywide from possible bankruptcy, as well as news that J.P. Morgan Chase is in "very early talks" with about a half-dozen regional banks, including Washington Mutual of Seattle, as evidence of a much-needed consolidation that in the long run could fortify the lending industry and eventually ease the nation's credit crunch.
At best, however, that dawn remains some ways off. Economists said the market drop yesterday signals that Wall Street is increasingly betting on a recession and failed to respond to vows by Federal Reserve Chairman Ben S. Bernanke that the central bank would act aggressively to prevent one.
The Dow Jones industrial average of 30 blue-chip stocks plunged 246.79, or 1.9 percent, to 12,606.30. The Standard & Poor's 500-stock index, a broader market measure, lost 19.31, or 1.4 percent, to 1401.02. The tech-heavy Nasdaq composite index declined 48.58, or 2 percent, to 2439.94.
"I almost feel like we're in the first innings of a bear market," said Jim Herrick, director of equity trading at Robert W. Baird. "It's really hard to see the light at the end of the tunnel."
Jitters were also stirred by a New York Times report that Merrill Lynch may take a $15 billion write-down when it reports earnings next week, exceeding the $12 billion that had been predicted. In addition, American Express shares shed 10.1 percent of their value after the company warned that it would take a charge of $440 million in the fourth quarter, in part to cover higher delinquencies.
As companies continue to be squeezed in the credit crunch, the landscape for financial institutions has increasingly become a matter of survival of the fittest. Wobbling mortgage lenders are searching for bailouts, and banks relatively unscathed by deteriorating mortgage assets are cautiously looking for discounted takeover targets.
Bank of America, at least on paper, is getting Countrywide on the cheap -- picking up the lender at a mere 31 percent of its book value. Yet even at that price, analysts fretted that Bank of America may still be taking on too much risk and exposing itself unnecessarily to what could be a far deeper cache of bad debt on Countrywide's books.
Other factors that will determine whether the United States is able to avoid a recession, or at least blunt its pain, are developments in the labor market, whether consumers continue to tighten their purse strings, and how much money financial institutions will be losing in the months to come as the shake-out continues.
Joe Brusuelas, chief economist at the research firm IdeaGlobal, said the magnitude of these losses may be staggering.
"We haven't even scratched the surface of what the losses will be," Brusuelas said. "I don't think we're anywhere near the end. Rather, we're still at the beginning of this."
On the plus side, some economists said, U.S. institutions are moving to deal with a bad situation far faster, for instance, than Japanese banks did after the collapse of that nation's real estate market in the early 1990s. Major U.S. financial institutions have written off $68 billion as they come to grips with the depths of their troubles.
"This all signals that we're moving in the right direction," said Art Hogan, chief market analyst for Jefferies & Co. "But we're going to have more bumps in the road ahead, especially next week, when many financial institutions will report their earnings and probably more write-offs."
Economic concerns deepened yesterday after the release of data showing an unexpectedly larger U.S. trade deficit in November, $63.1 billion. Analysts had hoped that the weaker dollar would help U.S. companies export America's way to a narrower trade gap. But while exports did stage a relatively robust uptick, they were more than offset by a 16.3 percent rise in the nation's bill for foreign oil.
The widening deficit has serious political ramifications, particularly in an election year in which globalization and free trade have become popular pi¿atas on the campaign trail as a blame for America's economic woes. Critics of free trade, as well as those who have pressed the Bush administration to get tougher on China in particular, have blamed those policies for zapping millions of jobs from the United States.
Protectionist fires are likely to be fanned by more revelations yesterday that major U.S. financial institutions are searching for cash infusions from sovereign wealth funds, the investment arms of foreign governments. Such funds in Asia and the Middle East are flush from the industrial revolution in China and soaring oil and gas exports in the Persian Gulf states.
To date, sovereign wealth funds have invested nearly $30 billion in Merrill Lynch, Citigroup, UBS, Morgan Stanley and Bear Stearns. Citigroup and Merrill are to get up to an additional $14 billion combined, the Wall Street Journal reported this week. Such deals are emerging as flashpoints for some critics, who insist that it is not in U.S. interests to have the nation's key financial institutions part-owned by foreign government entities.
In addition, Congress is considering bills that would clear the way for economic sanctions on China if it continues to prop up its currency, which some analysts say is being artificially undervalued by as much as 40 percent against the dollar to ensure that Chinese exports remain cheap.
In an interview yesterday, Commerce Secretary Carlos M. Gutierrez said the trade deficit with China had actually narrowed slightly in November and warned against slipping into a new era of protectionism.
"If the discussion were to translate into isolationist and protectionist policies, I think that would be bad for our economy and bad in terms of the message that we are sending to the world," Gutierrez said.