Newsweek & Time; Real Estate / Credit Bubble Articles
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First Newsweek and now Time Magazine. The MSM is finally getting it!
Newsweek Magazine; 20 August 2007 issue
When Fools Rush In, The Joke's on Them
An idea for a morality play: capture the madness of an era when investors, entranced by new technology, a novel set of economic assumptions and an all-powerful Federal Reserve, lost their heads, blew an exuberant bubble and suffered a painful bust.
Sure, it may be late for a chronicle of the zany dotcom 1990s. But this template can easily be adapted to the financial trend that has defined this decade—and that may have come to a close this week. It is, in a way, the Henny Youngman Economy. Lenders pleaded: "Take my money ... please!"
In recent months, harbingers of the end of the credit bubble have been popping up like shoots of yellow forsythia. The spring brought rising subprime delinquency rates and the ensuing failures of subprime lenders. In July, leveraged hedge funds tanked, and several massive corporate-debt offerings were shelved. This month, mortgage rates for borrowers with good credit have spiked, and credit-card giant Capital One Financial jacked up interest rates, citing "business and economic factors." The coup de grâce came on Tuesday, when Federal Reserve chairman Ben Bernanke dryly declared that he was in no mood to cut interest rates.
In the past six years, since Alan Greenspan's Federal Reserve slashed short-term interest rates after 9/11, and U.S. auto companies rolled out zero percent financing, cheap money evolved from a privilege extended only to the ultrarich into a near-constitutional right.
"Credit" derives from the Latin root credo, meaning "I believe." ("Subprime" comes from the Latin root sub primo, meaning "foreclosures in southern California.") And this credit boom rested on the staunch belief in three pillars of faith, all of which, coincidentally, underlay the 1990s boom.
Pillar #1. Technology, by ironing risk out of the system, obviates the business cycle and makes it safe to invest or lend at any level. In the new lending economy, the technology was securitization—the process through which loans are packaged and sold to investors.
Pillar #2. Asset prices continually rise. Banks were willing to lend 100 percent of the purchase price (and customers were willing to take on adjustable-rate mortgages that reset at higher rates after two years) because they knew a perpetually rising real-estate market would bail out even the most-leveraged borrowers.
Pillar #3. In a pinch, the Federal Reserve would step in with a well-timed interest-rate cut, just as it did after various 1990s crises, flooding the system with cheap money
Cue Mr. Youngman. As low rates proliferated, lenders fell over themselves to stuff cash in customers' pockets. And ultimately the lenders jumped the shark. Ninety-five percent loans gave way to no-money-down mortgages to buy preconstruction condos in Miami. Subprime loans morphed into low-doc loans, no-doc loans and, the ne plus ultra, NINJA loans: no income, no job, no assets. In this age of promiscuous credit, the overriding sentiment was trust, but don't verify.
Bankers proved similarly accommodating to corporations, especially to private-equity firms. Historically, most bank loans came loaded with covenants—early-warning systems that stipulate that the borrower has to keep spending to a certain level. But starting in 2005, Wall Street banks, eager to supply credit to hungry private-equity firms, began extending "covenant-lite" loans—debt blissfully free of such requirements. In May 2007, according to Goldman Sachs, such loans accounted for 15 percent of bank debt.
It all worked fantastically well—borrowers got their money, bankers collected their fees, investors harvested interest payments. But this year, one by one, the pillars underlying the Henny Youngman Economy crumbled. The securitization of subprime mortgages had the perverse effect of tethering more investors around the globe to the same crumbling assets. Home prices fell nationwide for the first time in a generation, down 2 percent between June 2006 and March 2007, according to the Case-Shiller Index. And Alan Greenspan's replacement, Bernanke, revealed himself to be more concerned with the prospects of inflation than with the prospect of unemployment among hedge-fund managers.
Chagrined lenders have been gripped by the sudden realization that debt can, and does, go bad. So just as rapidly as they rushed to lower standards, mortgage companies—the ones that remain solvent—and lenders of all types are rushing to tighten them. Credit, the fuel that powers the economy, is becoming more scarce and expensive. Somewhere, in the great borscht belt in the sky, Henny Youngman is hoisting his violin...
Time Magazine; 27 August 2007 issue
Ground Zero of the Real Estate Bust
excerpts from article --
.......Call it the international house of pancaked leverage, built on the proliferation of subprime and exotic mortgages that did away with many of the safeguards built into the classic 30-year fixed rate with a 20% down payment. Riskier loans originally designed for a narrow band of home buyers--interest only, adjustable rate, balloon payment, no documentation (of income, that is)--took off broadly in the last rising market, and Denver was one of the many areas where they were hot.
The demand was coming not so much from borrowers as from Wall Street, which packaged the loans into securities to sell to investors looking to pile into "low risk" real estate. So mortgage brokers found ways to squeeze buyers into first and second mortgages even when their finances were questionable. Consider the appellation NINJA, used to indicate a buyer with no income, no job and no assets. "Capital was made available to every Tom, Dick and Harry," says Zachary Urban, who runs the Colorado Foreclosure Hotline.......
........This local malaise, repeated in city after city, has ballooned into trillions of dollars in losses around the world, thanks to the magic of Wall Street's financial engineers. Blame it on one of the Street's recent innovations, the collateralized debt obligation, or CDO. The recipe: buy home loans, blend them, then slice up the result into different securities (reflecting different levels of risk) to sell to investors. Many such securities carry AAA or "investment grade" ratings despite subprime mortgages being in the mix. From there, things get really complex--CDOs created from other CDOs, synthetic CDOs crafted from credit-default swaps, none of which had experienced a down market. "The problem is that CDOs were untested. There was not much history to suggest CDOs would behave the same way as AAA corporate bonds," says Richard Bookstaber, a hedge-fund manager and author of A Demon of Our Own Design, who views market palpitations as a predictable by-product of complex financial products like CDOs. (For the author's take on the subprime disaster, go to time.com/bookstaber.
Now that the foundation is shaking, there are scant buyers for the lower-grade issues built on top of the pooled mortgages, and the values of those CDOs have plummeted. Losses in the subprime market drove Bear Stearns to declare two of its hedge funds, once topping $1.5 billion, all but worthless, and banks as far afield as Germany and France have frozen funds or received bailouts because of exposure to U.S. mortgages.
The Looming Disaster
FOR REAL ESTATE, NEXT YEAR COULD BE EVEN worse if interest rates don't fall. In 2008, some $680 billion worth of adjustable-rate mortgages are due to reset, according to Bank of America. That's $165 billion more than this year, and of those loans that are likely to carry higher rates, nearly three-quarters are subprime. Since many adjustable mortgages change rates after two or three years, the loans due for reset would have been written in 2005 and 2006, the years underwriting standards were bent the most. "It's clear that the performance of loans will be worse," says Mark Adelson, recently departed head of structured finance research at Nomura Securities, "but it's not yet clear how much worse."
One way to think about it is to consider how much more homeowners will have to pay to keep their mortgages current. According to an analysis by First American CoreLogic, a firm that tracks real estate and home loans, a typical subprime first mortgage that was originated in 2004 to 2006 will face a monthly increase of $407, and a typical teaser-rate loan, the type often sold to people based on their ability to pay the introductory rate and not the reset, will see monthly payments jump by $1,512........
........houses don't trade like stocks, so when it comes to correcting the system when it gets out of whack, we're talking years, not weeks. "Real estate," says housing economist Thomas Lawler, "is a slow, tedious process." In July, after the two Bear Stearns hedge funds first ran into trouble, bond guru Bill Gross of Pimco wrote a foreboding investment outlook, pointing out that hedge funds tied up in trading are the top layer of the problem, not the root. That can be demonstrated in the Mile High City and, as Gross wrote, "in the Summerlin suburbs of Las Vegas, Nevada, and in the extended city limits of Chicago headed west towards Rockford, and yes, the naked (and empty) rows of multistoried condos in Miami, Florida." It's a big problem. How big, we're still waiting to find out.
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First Newsweek and now Time Magazine. The MSM is finally getting it!
Newsweek Magazine; 20 August 2007 issue
When Fools Rush In, The Joke's on Them
An idea for a morality play: capture the madness of an era when investors, entranced by new technology, a novel set of economic assumptions and an all-powerful Federal Reserve, lost their heads, blew an exuberant bubble and suffered a painful bust.
Sure, it may be late for a chronicle of the zany dotcom 1990s. But this template can easily be adapted to the financial trend that has defined this decade—and that may have come to a close this week. It is, in a way, the Henny Youngman Economy. Lenders pleaded: "Take my money ... please!"
In recent months, harbingers of the end of the credit bubble have been popping up like shoots of yellow forsythia. The spring brought rising subprime delinquency rates and the ensuing failures of subprime lenders. In July, leveraged hedge funds tanked, and several massive corporate-debt offerings were shelved. This month, mortgage rates for borrowers with good credit have spiked, and credit-card giant Capital One Financial jacked up interest rates, citing "business and economic factors." The coup de grâce came on Tuesday, when Federal Reserve chairman Ben Bernanke dryly declared that he was in no mood to cut interest rates.
In the past six years, since Alan Greenspan's Federal Reserve slashed short-term interest rates after 9/11, and U.S. auto companies rolled out zero percent financing, cheap money evolved from a privilege extended only to the ultrarich into a near-constitutional right.
"Credit" derives from the Latin root credo, meaning "I believe." ("Subprime" comes from the Latin root sub primo, meaning "foreclosures in southern California.") And this credit boom rested on the staunch belief in three pillars of faith, all of which, coincidentally, underlay the 1990s boom.
Pillar #1. Technology, by ironing risk out of the system, obviates the business cycle and makes it safe to invest or lend at any level. In the new lending economy, the technology was securitization—the process through which loans are packaged and sold to investors.
Pillar #2. Asset prices continually rise. Banks were willing to lend 100 percent of the purchase price (and customers were willing to take on adjustable-rate mortgages that reset at higher rates after two years) because they knew a perpetually rising real-estate market would bail out even the most-leveraged borrowers.
Pillar #3. In a pinch, the Federal Reserve would step in with a well-timed interest-rate cut, just as it did after various 1990s crises, flooding the system with cheap money
Cue Mr. Youngman. As low rates proliferated, lenders fell over themselves to stuff cash in customers' pockets. And ultimately the lenders jumped the shark. Ninety-five percent loans gave way to no-money-down mortgages to buy preconstruction condos in Miami. Subprime loans morphed into low-doc loans, no-doc loans and, the ne plus ultra, NINJA loans: no income, no job, no assets. In this age of promiscuous credit, the overriding sentiment was trust, but don't verify.
Bankers proved similarly accommodating to corporations, especially to private-equity firms. Historically, most bank loans came loaded with covenants—early-warning systems that stipulate that the borrower has to keep spending to a certain level. But starting in 2005, Wall Street banks, eager to supply credit to hungry private-equity firms, began extending "covenant-lite" loans—debt blissfully free of such requirements. In May 2007, according to Goldman Sachs, such loans accounted for 15 percent of bank debt.
It all worked fantastically well—borrowers got their money, bankers collected their fees, investors harvested interest payments. But this year, one by one, the pillars underlying the Henny Youngman Economy crumbled. The securitization of subprime mortgages had the perverse effect of tethering more investors around the globe to the same crumbling assets. Home prices fell nationwide for the first time in a generation, down 2 percent between June 2006 and March 2007, according to the Case-Shiller Index. And Alan Greenspan's replacement, Bernanke, revealed himself to be more concerned with the prospects of inflation than with the prospect of unemployment among hedge-fund managers.
Chagrined lenders have been gripped by the sudden realization that debt can, and does, go bad. So just as rapidly as they rushed to lower standards, mortgage companies—the ones that remain solvent—and lenders of all types are rushing to tighten them. Credit, the fuel that powers the economy, is becoming more scarce and expensive. Somewhere, in the great borscht belt in the sky, Henny Youngman is hoisting his violin...
Time Magazine; 27 August 2007 issue
Ground Zero of the Real Estate Bust
excerpts from article --
.......Call it the international house of pancaked leverage, built on the proliferation of subprime and exotic mortgages that did away with many of the safeguards built into the classic 30-year fixed rate with a 20% down payment. Riskier loans originally designed for a narrow band of home buyers--interest only, adjustable rate, balloon payment, no documentation (of income, that is)--took off broadly in the last rising market, and Denver was one of the many areas where they were hot.
The demand was coming not so much from borrowers as from Wall Street, which packaged the loans into securities to sell to investors looking to pile into "low risk" real estate. So mortgage brokers found ways to squeeze buyers into first and second mortgages even when their finances were questionable. Consider the appellation NINJA, used to indicate a buyer with no income, no job and no assets. "Capital was made available to every Tom, Dick and Harry," says Zachary Urban, who runs the Colorado Foreclosure Hotline.......
........This local malaise, repeated in city after city, has ballooned into trillions of dollars in losses around the world, thanks to the magic of Wall Street's financial engineers. Blame it on one of the Street's recent innovations, the collateralized debt obligation, or CDO. The recipe: buy home loans, blend them, then slice up the result into different securities (reflecting different levels of risk) to sell to investors. Many such securities carry AAA or "investment grade" ratings despite subprime mortgages being in the mix. From there, things get really complex--CDOs created from other CDOs, synthetic CDOs crafted from credit-default swaps, none of which had experienced a down market. "The problem is that CDOs were untested. There was not much history to suggest CDOs would behave the same way as AAA corporate bonds," says Richard Bookstaber, a hedge-fund manager and author of A Demon of Our Own Design, who views market palpitations as a predictable by-product of complex financial products like CDOs. (For the author's take on the subprime disaster, go to time.com/bookstaber.
Now that the foundation is shaking, there are scant buyers for the lower-grade issues built on top of the pooled mortgages, and the values of those CDOs have plummeted. Losses in the subprime market drove Bear Stearns to declare two of its hedge funds, once topping $1.5 billion, all but worthless, and banks as far afield as Germany and France have frozen funds or received bailouts because of exposure to U.S. mortgages.
The Looming Disaster
FOR REAL ESTATE, NEXT YEAR COULD BE EVEN worse if interest rates don't fall. In 2008, some $680 billion worth of adjustable-rate mortgages are due to reset, according to Bank of America. That's $165 billion more than this year, and of those loans that are likely to carry higher rates, nearly three-quarters are subprime. Since many adjustable mortgages change rates after two or three years, the loans due for reset would have been written in 2005 and 2006, the years underwriting standards were bent the most. "It's clear that the performance of loans will be worse," says Mark Adelson, recently departed head of structured finance research at Nomura Securities, "but it's not yet clear how much worse."
One way to think about it is to consider how much more homeowners will have to pay to keep their mortgages current. According to an analysis by First American CoreLogic, a firm that tracks real estate and home loans, a typical subprime first mortgage that was originated in 2004 to 2006 will face a monthly increase of $407, and a typical teaser-rate loan, the type often sold to people based on their ability to pay the introductory rate and not the reset, will see monthly payments jump by $1,512........
........houses don't trade like stocks, so when it comes to correcting the system when it gets out of whack, we're talking years, not weeks. "Real estate," says housing economist Thomas Lawler, "is a slow, tedious process." In July, after the two Bear Stearns hedge funds first ran into trouble, bond guru Bill Gross of Pimco wrote a foreboding investment outlook, pointing out that hedge funds tied up in trading are the top layer of the problem, not the root. That can be demonstrated in the Mile High City and, as Gross wrote, "in the Summerlin suburbs of Las Vegas, Nevada, and in the extended city limits of Chicago headed west towards Rockford, and yes, the naked (and empty) rows of multistoried condos in Miami, Florida." It's a big problem. How big, we're still waiting to find out.
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Comments
Article from September 3, 2007 issue of Time Magazine:
...But when we do not even guarantee basic health care, it would be nuts to think about making protection against real estate losses part of the social safety net....
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Your House Is Worth Less? Good
The last time we had this feeling of financial vertigo was when the Internet bubble popped seven years ago. But this is much worse: the value of our homes is collapsing. For generations, rising home prices have been central to our general sense of well-being.
So why is the real estate collapse a good thing? First, because the collapse of any financial bubble can be interpreted as a morality play: greed gets its comeuppance. Subprime mortgages play the role that used to be played by junk bonds. They represent easy money--too easy, in retrospect. Borrowed money, if it gets out of hand, puts economic history on speed: everything rises faster, then collapses harder. Foolish lenders become the enablers of foolish borrowers. In the 1990s, people came to believe that stock prices would rise forever. They learned differently. And now we are learning differently about real estate as well. Whenever the price people will pay today depends on the belief that other people will pay even more tomorrow, you've got a bubble. It takes only a slight letdown in those expectations to send the whole delightful, self-feeding process into reverse......
.....All these rising house values added trillions to our sense of national wealth, but it is an illusion. If everybody, or even a fraction of everybody, tried to cash in on this rising value, prices would collapse, and the value would disappear. Economists predicted for years that something like this would happen as the boomer generation aged. Nobody believed them.
Since most families own their homes, the country is happier when real estate prices are going up. But it is healthier when prices are going down. Look at it this way: in the housing market, people fall into three categories. Some, mostly young folks, are trying to buy their first home. Some, at various stages of midlife, own a home but will trade up someday, or at least think about it. And some, mostly older, are trying to sell and downsize. Who is served by soaring house prices? Not the first group: rising prices make it hard for those people to get into the game. Not the second group: what it will have to pay for a bigger house is probably increasing faster than what it can get for the current one.
The only clear beneficiaries of rising house prices are those, generally older, who want to sell their home and buy a smaller one or none at all. These people, on average, have benefited the most from the spectacular rise of real estate prices over their entire adult lives. If they have to forgo part of that windfall, it is no tragedy.
If they borrowed against a value for their house that turns out to be fictitious and spent the money on ephemeral things like vacations, as the commercials urge them to do, that was foolish--in some cases, maybe even tragically foolish. People want the government to do something, and presidential candidates are beavering away at plans. But any plan that would prevent home prices from declining would be foolishness squared. Genuine tragedy deserves sympathy and help, even if it is the result of your own foolishness. But when we do not even guarantee basic health care, it would be nuts to think about making protection against real estate losses part of the social safety net.
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The Boom in Foreclosure Investing
As foreclosures skyrocket, a growing number of investors are becoming enamored with the idea of buying up distressed properties, doing a little rehab, and then putting the homes back on the market to turn a tidy, double-digit profit. "We call them wannabe investors," says Rob Munn, who has been buying and selling foreclosures for eight years in Tennessee and Florida. "They watch Flip This House, and think, 'I can do that.'"......
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Ben Bernanke Walks the Line
Much of what Ben Bernanke spends his days doing oscillates between the incomprehensibly arcane and the unspeakably dull. Lately, though, the Federal Reserve chairman has a stark, even exciting task at hand. He's been imitating Jimmy Stewart in It's a Wonderful Life and trying to halt a bank run.
While Stewart's George Bailey had to make do with his powers of persuasion and his honeymoon fund to save the Bailey Building and Loan, Bernanke has the full faith and credit of the U.S. government behind him. The Fed can effectively print U.S. dollars at will. It can even, as Bernanke famously suggested in 2002, drop them out of helicopters, if that's what it takes.
Unlike Bailey, though, Bernanke doesn't know all his customers or even his loan officers. He cannot reassure nervous depositors (a.k.a. lenders) by telling them exactly where their money is invested, because he has no clear idea himself. He probably suspects that many borrowers and lenders have been up to no good and richly deserve the bad things that are happening to them. And while he can manufacture cash, he knows that if he overdoes it, hyperinflation and a dollar crash could result.
So Bernanke walks a thin line. Too far in one direction, and he bails out all the irresponsible people and institutions that have gotten us into the subprime mess and subsequent debt-market crunch. Too far in the other, and the global financial system collapses on his watch. ".....
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From Sept 10, 2007 issue of Newsweek Magazine
The New Money Pit
It started with subprime mortgages. Now owners of McMansions are defaulting, and the effects of the housing bust are beginning to ripple through the economy.......
.........what started with the subprime-mortgage mess and subsequent credit crunch are turning communities like Black Mountain Vista into luxury ghost towns. Buyers who got in over their heads are being forced to abandon their homes, leaving behind empty McMansions on the California coast and see-through condominium towers on Miami Beach. Real estate is turning into a money pit, sapping the fortunes of home buyers, hedge-fund managers and house painters alike. The really bad news? This is only the beginning......
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From September 10, 2007 issue of Time Magazine:
Reward the Good Guys
Maybe home mortgages ought to be left to the banks and thrifts......
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......Selling off fixed-rate mortgages was one way of moving risk out of the banking system. The growth in the 1980s and 1990s of Fannie and Freddie--which can buy loans of up to $417,000--and of private markets for bigger, or jumbo, loans made this possible. It also enabled the rapid rise of independent lenders, Countrywide most prominent among them, that sold all their loans on the secondary market.
These firms face little of the interest-rate risk that bedeviled S&Ls. And they can shove most of the credit risk--the chance that a loan will go bad--onto the buyers of their mortgages. As a result, investors were initially willing to purchase only the lowest-risk loans--the good-credit, 20%-down variety. Fannie and Freddie still do that because they're required to by law. But in the past few years, private investors looking for higher returns began pouring money into iffier loans, underestimating the danger.
Now those investors have turned shy, and banks and thrifts, which sell some loans and hold on to others, have begun regaining lost market share. Countrywide, the biggest mortgage lender in recent years, is trying to join them by moving more of its business to a bank it bought in 2001.
Ely (Bert Ely, an Alexandria, Va., banking consultant and expert on the S&L meltdown) would like to see Washington encourage this trend. "There needs to be a shift of mortgage risk back into the banking industry," he says. "There's risk--it's not gonna go away--but we need to have it in banks." The banks and thrifts have natural incentives to ferret out and manage credit risk. They're also in a better position than dispersed mortgage markets to restructure troubled loans. And it looks as if the regulators who oversee them may have learned from experience how to prevent financial crises rather than cause them.
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Housing related articles in the 24 Sept 2007 issue of Time magazine
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"We can't make any more of the land, but we can build huge high-rises on the beach." - Robert Shiller
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Coping With a Real-Estate Bust
The real estate slump has no quick fix, and could expand into a full-blown recession.....
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What Homeowners Can Do
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The eternal question in response to any market volatility — be it up or down, in stocks or real estate — is a simple one: How does this affect me? In housing it depends, of course, on which rung of the real estate ladder you occupy.
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Buyers: Maximizing The Advantage.......
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Sellers: How to Limit the Damage.......
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Debtors: Facing Up To Foreclosure.......
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Investors: Heading Into Vulture Mode.......
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Renters: In the Perfect Spot.........
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Newsweek: 2-3 October 2007
Reassessing the Boom
Not long ago, real-estate appraisers arrived on doorsteps with nothing but great news. Today they're providing a sobering reality check......
Deutsche Bank to write off $3.12 billion
Deutsche Bank said Wednesday it will write off around $3.12 billion related to the U.S. mortgage morass, but that gains from asset sales and tax credits will still help Germany's biggest bank earn a third-quarter profit of about $1.98 billion.........
Big Losers in the Subprime Mess
U.S. financial institutions have been hard hit by the subprime-mortgage mess. This summer, two Bear Stearns hedge funds that invested in subprime mortgage bonds went belly-up. Citigroup on Monday blamed problems with subprime bonds for charges it must take against earnings. Generally speaking, however, the financial complex has collectively weathered the credit storm rather well. Goldman Sachs last month reported a blowout quarter.
European banks haven't been quite so lucky, as some of the biggest names in continental finance have been laid low on U.S. subprime debt.............
Pending home sales fall to record low
An index that forecasts near-term home sales fell in August to a record low as would-be homebuyers had difficulty getting mortgages.
The National Association of Realtors said Tuesday its seasonally adjusted index of pending sales for existing homes fell 6.5 percent from July and 21.5 percent from a year ago.
August's reading of 85.5 was below analysts' expectations and the lowest ever for the index, which started in January 2001. Analysts surveyed by Briefing.com had predicted the index would fall by 2 percent from July.........
There's No Inflation (If You Ignore Facts)
......Signs of inflation are evident throughout the economy.........
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