May 23, 2008
This week featured subprime players behaving badly, dour economic forecasts, and higher oil prices. Debate as to whether we are through the worst of the credit crisis rages on. And the week's news indicated that the economy stinks and is getting worse. Here are some highlights.
- The Federal Reserve released the minutes of the April meeting. The Fed members indicated that they are done cutting rates for the foreseeable future. The Fed also sees slower economic growth, higher unemployment, and higher inflation. So, the economy is going to hell in a handbasket and the Fed is out of rate-cut ammunition. The market didn't like the news.
- Meredith Whitney, the Oppenheimer analyst who gained recognition for correctly anticipating woes at Citigroup (NYSE: C ) , says the worst of the credit crisis is still ahead and should last well into 2009 and possibly beyond. Hmm. Let's keep in mind that this is a Wall Street analyst who has gained instant fame for making just one correct call.
- Mortgage application volume was down 7.8% last week. Meanwhile, the Mortgage Bankers Association (MBA) index fell to 621.6 from 674.4. The index supposedly gives a picture of mortgage lending activity throughout the country and is thought to represent about 50% of all mortgage applications in the country. The index started in March 1990 at 100 and peaked in May 2003 at 1,856.7. So, according to the index, mortgage activity is only about one-third of what it was during the housing boom, but more than six times what it was in 1990. I just find it startling that even in this housing slump, mortgage activity is six times the 1990 level.
- Countrywide (NYSE: CFC ) chief executive Angelo Mozilo made an appalling gaffe this week. No, it wasn't overindulging in subprime loans and throwing his company and the U.S. economy into a tailspin. That was before. This week, he sent an errant email. Mozilo responded to an email from a disgruntled customer with his own email, opining that there seemed to be a common source providing counseling to the borrowers who were requesting assistance from the company. "Disgusting," wrote Mozilo. The problem was that he meant to "forward" the email response to one of his lackeys, but he hit "reply" by mistake and sent the response to the customer. News of the email hit the Internet and the blogosphere went crazy. The episode was particularly heinous because it pitted a predatory fat cat against a poor borrower who couldn't be expected to realize that his adjustable-rate mortgage had a rate that could adjust.
- The Financial Times reported that a coding error at Moody's (NYSE: MCO ) resulted in improper ratings for about $4 billion of complex debt. Moody's is already under fire for allegedly improper ratings on mortgage debt leading to huge write-downs at Citigroup (NYSE: C ) ,UBS (NYSE: UBS ) , Wachovia (NYSE: WB ) , Merrill Lynch (NYSE: MER ) , Bank of America (NYSE: BAC ) , and others. The FT also reported that it possessed internal documents that indicate the rating agency was aware of the coding error in early 2007 and yet still maintained improper Aaa ratings until early 2008. The company announced that, in the interest of finding the technical cause of the complex computer problem, it had hired a bunch of lawyers.
The drama plays out every week in different ways. Who knows what next week will bring? Stay tuned.