Fallout From Credit Crunch Creates Another One
After improving in September and early October, markets in a wide variety of debt -- including for home mortgages, consumer loans, and corporate buyouts -- have sharply deteriorated in recent weeks. Investors view much of this debt as riskier than they did even at the height of the August credit crisis and are requiring higher interest rates as compensation.</br></br>While markets are behaving in a more orderly fashion than they were in August, many on Wall Street fear that the situation will get worse before it gets better. "This is just dragging on longer," said Axel Merk, a portfolio manager for Merk Hard Currency Fund. "We're very early in this."</br></br>Economists increasingly worry that banks are suffering such massive losses that they will be forced to cut back their lending to consumers and businesses. That would slow the economy, much as the savings and loan crisis did in the early 1990s. Yesterday, an analyst predicted that Citigroup, the world's biggest financial services company, would suffer another $15 billion in losses in the coming six months from its exposure to exotic types of debt.</br></br>That prediction, along with fresh negative data about the housing market, drove the Dow Jones industrial average down 218 points, or 1.7 percent. Financial markets are pointing to a strong possibility of even more bad news.</br></br>For example, futures markets indicate that there is a 20 percent chance that the Federal Reserve will cut interest rates by half a percentage point or more at its next policy meeting Dec. 11, even though it is widely understood that the central bank would do so only if there were highly negative economic news between now and then. An index measuring the cost of insuring against credit losses on 125 financially sound companies reached an all-time high yesterday. And the market for securities backed by commercial real estate loans, which had been little affected through the August crunch, is showing strain.