WASHINGTON, US – A YEAR after a summer subprime crisis roiled markets and squeezed credit worldwide, analysts are looking for signs the worst is over for the troubled US housing market and banks that made risky bets on the sector.
Economists are divided on the crisis at the approach of summer, with memories still fresh of a turbulent period in 2007 that resulted in an upheaval in global markets in July and August.
Federal Reserve chairman Ben Bernanke said this month that the risk of a severe downturn stemming from the housing meltdown ‘appears to have diminished.’
Treasury Secretary Henry Paulson also argues the crisis is winding down: ‘In my judgment we are closer to the end of the market turmoil than the beginning,’ he said last month.The roots of the problem stem from years of easy credit, but troubles began building in January 2007 when rising levels of defaults on subprime or risky mortgages started to rise as adjustable-rate loans were ‘reset.’
A wave of bankruptcies among subprime lenders occurred in the subsequent months and various investment banks and hedge funds began to start acknowledging hefty losses from investments tied to US real estate loans.
British bank HSBC was among the first, shaking up its ranks after announcing losses of more than US$10 billion (S$13.6 billion). Citigroup, UBS and Merrill Lynch and others followed, while Bear Stearns announced in June that its hedge funds involved in subprime loans were in trouble.
The crisis heated up on July 10 as Standard & Poor’s and Moody’s downgraded over 12 billion dollars in bonds backed by subprime loans, and days later when Bear Stearns said its hedge fund losses would top 90 per cent.
Turmoil hit a frenzy in July and August with more troubles for Bear Stearns and a near-meltdown at top mortgage lender Countrywide Financial.
As credit dried up and stock markets plunged, the Fed swung into action, slashing its discount rate for direct loans to banks August 17, the first in a series of moves to help get credit flowing in a global financial system in disarray.
Since the first subprime problems emerged in early 2007, losses recognised by large financial institutions are nearing US$400 billion and capital injections close to US$300 billion, notes economist Stephen Gallagher at Societe Generale, who argues that the outlook is still murky.
‘More write-offs may be in store,’ he said. ‘Values of credit assets held by financial institutions are once again coming under pressure.’
Some say the crisis turned a corner with the March rescue of Bear Stearns after its near-implosion by JPMorgan Chase in a deal backed by US$29 billion in Federal Reserve guarantees.
‘A generalised credit collapse seems now most unlikely due to the Fed’s actions in connection with Bear Stearns,’ said Mr Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton business school.
‘That increasingly looks like the turning point in this financial crisis.’
The International Monetary Fund estimated in April worldwide losses stemming from the US subprime mortgage crisis could hit US$945 billion as the impact spreads in the global economy.
Home values are still sliding and construction has fallen to the slowest pace in 17 years.
Mr Ed McKelvey, economist at Goldman Sachs, sees an ‘L-shaped’ recovery in the sector – meaning no real recovery for some time.
‘We do not expect housing activity to stage the kind of vigorous rebound that has been traditional following large corrections in this sector,’ he said.
‘This is because this cycle – unlike the earlier ones – has been induced by a long and massive buildup of excess supply of housing … it is unlikely that builders will see a sustained improvement in the balance of demand and supply for the homes they are building until the excess supply has been whittled down substantially.’
Mr Joel Naroff at Naroff Economic Advisors said he agrees with Mr Paulson and Mr Bernanke that the crisis is easing, ‘but that doesn’t mean we’re out of the woods yet.’
He said the risk is that broader economic problems will lead to job losses that affect not only subprime borrowers but those with solid credit who may have trouble paying mortgages and may be unable to sell their homes because of price declines and tight credit conditions.
‘To say we’ve seen it all is a bit premature,’ Mr Naroff said. ‘We just don’t know who’s going to default and not default.’
The US economy, teetering on the brink of recession, may not recover until the flow of credit returns and banks become more confident, he said.
‘The credit markets are moving toward a more normal situation, not normal but more normal,’ Mr Naroff said.
‘I agree we’re closer to the end than the beginning, but that doesn’t mean there won’t be some big bumps in the road.’ — AFP