Emerging Markets Could Get Uglier: ‘Still Pretty Early Days’ in Crisis
23 October 2008
The notion of “decoupling” has gone out the window as emerging markets are not only suffering alongside the U.S., they’re faring far worse.
The year-long pattern continued on Wednesday: While the Dow suffered a 5.7% drop, the iShares MSCI Emerging Markets Index (EEM) – a commonly used benchmark – tumbled 10.5%.
Strains in emerging markets are likely to get worse before they get better, according to Roy Smith, a professor of finance and international business at NYU’s Stern School, author and former head of Goldman Sachs International.
Debt defaults by Argentina and Pakistan are definite possibilities in the near term, he says, while they and other nations like Hungary and Iceland will see economic growth stagnate because capital continues to flow to safer havens, notably the U.S.
“It’s still pretty early days” and this crisis could ultimate get as “ugly” as the 1997 ‘Asian Contagion’ and/or the 1998 Russian debt default, Smith says. Still, he believes it’s a mistake to sell emerging market equities given the damage to date -- assuming investors can stomach more potential weakness before the inevitable recovery.
WASHINGTON (Reuters) - Former Federal Reserve Chairman Alan Greenspan told Congress on Thursday he is "shocked" at the breakdown in U.S. credit markets and said he was "partially" wrong to resist regulation of some securities.
Despite concerns he had in 2005 that risks were being underestimated by investors, "this crisis, however, has turned out to be much broader than anything I could have imagined," Greenspan said in remarks prepared for delivery to the House of Representatives Committee on Oversight and Government Reform.
"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity -- myself especially -- are in a state of shocked disbelief," said Greenspan, who stepped down from the Fed in 2006.
With a general election looming November 4, U.S. lawmakers were sharply divided along political lines in either blaming regulators or bickering for failure to prevent the crisis that has gripped financial markets around the world.
"The reasons why we set up your agencies and gave you budget authority to hire people is so you can see problems developing before they become a crisis," Committee Chairman Henry Waxman, a California Democrat, told a panel that included Securities and Exchange Commission Chairman Christopher Cox and former U.S. Treasury Secretary John Snow.
"To say you just didn't see it, that just doesn't satisfy me," Waxman said.
Republicans, for their part, singled out government sponsored mortgage finance agencies Fannie Mae and Freddie Mac for their role in unsettling financial markets and faulted Congress, which has been led by the Democrats since 2006, for failing to pass measures to rein them in sooner.
They angrily protested a decision not to hold a hearing on the mortgage finance firms, which the government took over in September to restore financial health, until two weeks after the election.
"PARTIALLY" WRONG
Greenspan softened his longstanding opposition to many forms of financial market regulation, acknowledging in an exchange with Waxman that he was "partially" wrong in his belief that some trading instruments, specifically credit default swaps, did not need oversight.
Waxman cited a series of public statements by Greenspan saying the market could handle regulation of derivatives without government intervention.
"My question is simple: Were you wrong?" Waxman asked.
Greenspan said he was "partially" wrong in the case of credit default swaps, complex trading instruments meant to act as insurance against default for bond buyers.
While Greenspan was once hailed as one of the most accomplished central bankers in U.S. history, the low interest rates during his final years at the Fed have been blamed for fueling the housing bubble and eventual crash that touched off the current financial crisis.
His strong advocacy for limited regulation of financial markets has also been called into question as a result of the crisis.
The former Fed chair said that a securitization system that stimulated appetite for loans made to borrowers with spotty credit histories, was at the heart of the breakdown of credit markets.
"Without the excess demand from securitizers, subprime mortgage originations -- undeniably the original source of crisis -- would have been far smaller and defaults, accordingly, far fewer," he said.
A surge in demand for U.S. subprime securities, supported by unrealistically positive ratings by credit agencies, was the core of the problem, he added.
Greenspan proposed that that securitizers be required to retain "a meaningful part" of securities they issued. He said that regulatory reform will be necessary in the areas of fraud, settlement, and securitization to re-establish financial stability.
He backed the recently approved $700 billion bailout package, saying that without it, banks and other financial institutions would likely face a serious reduction in credit.
"DOG AND PONY SHOW"
Lawmakers from both parties also took advantage of the packed hearing room to take some political potshots. Democrats assailed gaps in rules and oversight while Republicans faulted Fannie Mae and Freddie Mac for exacerbating credit market strains.
"For too long, the prevailing attitude in Washington has been that the market always knows best," said Committee Chairman Waxman, a Democrat.
Republicans circulated an October 20 letter asking for a government investigation of alleged fraud and mismanagement at the mortgage firms.
"This is a nice dog and pony show and maybe it's theater, but people want someone held accountable, they want someone to go to jail," said Rep. John Mica, a Florida Republican.
But Greenspan told lawmakers that regulators could not predict the future or make perfect decisions.
"It's a very difficult problem with respect to supervision and regulation," he said. "We cannot expect perfection in any area where forecasting is required. We have to do our best but cannot expect infallibility or omniscience," he added.
It was Clinton who initiated subprime mortgage loans...
"Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits."
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.
''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''
Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''
Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.
Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.
Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.
In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.
Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.
In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.
The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.
3 comments:
Emerging Markets Could Get Uglier: ‘Still Pretty Early Days’ in Crisis
23 October 2008
The notion of “decoupling” has gone out the window as emerging markets are not only suffering alongside the U.S., they’re faring far worse.
The year-long pattern continued on Wednesday: While the Dow suffered a 5.7% drop, the iShares MSCI Emerging Markets Index (EEM) – a commonly used benchmark – tumbled 10.5%.
Strains in emerging markets are likely to get worse before they get better, according to Roy Smith, a professor of finance and international business at NYU’s Stern School, author and former head of Goldman Sachs International.
Debt defaults by Argentina and Pakistan are definite possibilities in the near term, he says, while they and other nations like Hungary and Iceland will see economic growth stagnate because capital continues to flow to safer havens, notably the U.S.
“It’s still pretty early days” and this crisis could ultimate get as “ugly” as the 1997 ‘Asian Contagion’ and/or the 1998 Russian debt default, Smith says. Still, he believes it’s a mistake to sell emerging market equities given the damage to date -- assuming investors can stomach more potential weakness before the inevitable recovery.
Greenspan "shocked" at credit system breakdown
By Mark Felsenthal
Oct 23, 2008
WASHINGTON (Reuters) - Former Federal Reserve Chairman Alan Greenspan told Congress on Thursday he is "shocked" at the breakdown in U.S. credit markets and said he was "partially" wrong to resist regulation of some securities.
Despite concerns he had in 2005 that risks were being underestimated by investors, "this crisis, however, has turned out to be much broader than anything I could have imagined," Greenspan said in remarks prepared for delivery to the House of Representatives Committee on Oversight and Government Reform.
"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity -- myself especially -- are in a state of shocked disbelief," said Greenspan, who stepped down from the Fed in 2006.
With a general election looming November 4, U.S. lawmakers were sharply divided along political lines in either blaming regulators or bickering for failure to prevent the crisis that has gripped financial markets around the world.
"The reasons why we set up your agencies and gave you budget authority to hire people is so you can see problems developing before they become a crisis," Committee Chairman Henry Waxman, a California Democrat, told a panel that included Securities and Exchange Commission Chairman Christopher Cox and former U.S. Treasury Secretary John Snow.
"To say you just didn't see it, that just doesn't satisfy me," Waxman said.
Republicans, for their part, singled out government sponsored mortgage finance agencies Fannie Mae and Freddie Mac for their role in unsettling financial markets and faulted Congress, which has been led by the Democrats since 2006, for failing to pass measures to rein them in sooner.
They angrily protested a decision not to hold a hearing on the mortgage finance firms, which the government took over in September to restore financial health, until two weeks after the election.
"PARTIALLY" WRONG
Greenspan softened his longstanding opposition to many forms of financial market regulation, acknowledging in an exchange with Waxman that he was "partially" wrong in his belief that some trading instruments, specifically credit default swaps, did not need oversight.
Waxman cited a series of public statements by Greenspan saying the market could handle regulation of derivatives without government intervention.
"My question is simple: Were you wrong?" Waxman asked.
Greenspan said he was "partially" wrong in the case of credit default swaps, complex trading instruments meant to act as insurance against default for bond buyers.
While Greenspan was once hailed as one of the most accomplished central bankers in U.S. history, the low interest rates during his final years at the Fed have been blamed for fueling the housing bubble and eventual crash that touched off the current financial crisis.
His strong advocacy for limited regulation of financial markets has also been called into question as a result of the crisis.
The former Fed chair said that a securitization system that stimulated appetite for loans made to borrowers with spotty credit histories, was at the heart of the breakdown of credit markets.
"Without the excess demand from securitizers, subprime mortgage originations -- undeniably the original source of crisis -- would have been far smaller and defaults, accordingly, far fewer," he said.
A surge in demand for U.S. subprime securities, supported by unrealistically positive ratings by credit agencies, was the core of the problem, he added.
Greenspan proposed that that securitizers be required to retain "a meaningful part" of securities they issued. He said that regulatory reform will be necessary in the areas of fraud, settlement, and securitization to re-establish financial stability.
He backed the recently approved $700 billion bailout package, saying that without it, banks and other financial institutions would likely face a serious reduction in credit.
"DOG AND PONY SHOW"
Lawmakers from both parties also took advantage of the packed hearing room to take some political potshots. Democrats assailed gaps in rules and oversight while Republicans faulted Fannie Mae and Freddie Mac for exacerbating credit market strains.
"For too long, the prevailing attitude in Washington has been that the market always knows best," said Committee Chairman Waxman, a Democrat.
Republicans circulated an October 20 letter asking for a government investigation of alleged fraud and mismanagement at the mortgage firms.
"This is a nice dog and pony show and maybe it's theater, but people want someone held accountable, they want someone to go to jail," said Rep. John Mica, a Florida Republican.
But Greenspan told lawmakers that regulators could not predict the future or make perfect decisions.
"It's a very difficult problem with respect to supervision and regulation," he said. "We cannot expect perfection in any area where forecasting is required. We have to do our best but cannot expect infallibility or omniscience," he added.
It was Clinton who initiated subprime mortgage loans...
"Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits."
________________________________________________________________________________
Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES
Published: September 30, 1999
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.
''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''
Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''
Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.
Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.
Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.
In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.
Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.
In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.
The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.
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