October 18, 2007

The Markets are Telling Us Something

The big banks have reported earnings and what is clear to me are two things:

1. They lost a bundle: Bank of America corporation chalked up big charges due to credit-related turmoil. They lost something like 33% this quarter, suggesting that the problems in the credit market may yet be closer to the beginning than to the end. Citigroup saw its profit drop 57% in the third quarter.
2. Even they were not aware of how bad this would become. I remember Citigroup saying that they were very surprised that there losses were so high. Th is is the largest bank in the world and 57% of its quarterly income is a huge amount of money.
3. If the lenders arent sure how bad there loans are, then no one has a handle on the extent of this problem.

The Secty of the Treasury summed up the recent mess this way according to an article via Mortgage Daily News;
  • Housing starts are off more than 40 percent from the peak of 2.3 million units in early 2006;
  • employment in residential building, including specialty trade contractors, has dropped by almost 200,000 since early 2006, offsetting about one-quarter of the jobs gained in the housing boom, and mortgage defaults and foreclosures are rising.
  • At the end of the second quarter of this year, more than 900,000 subprime loans were at least 30 days delinquent.
  • Foreclosures have increased about 50 percent from 2000 to 2006 and those involving subprime loans are up over 200 percent in that same period.
  • Current trends suggest there will be just over 1 million foreclosure starts this year - of which 620,000 will be subprime.
"The housing decline is still unfolding," the Secretary said, "and I view it as the most significant current risk to our economy.

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