Growing subprime worries rattle markets

Traders work on the floor of the New York Stock Exchange.

TEXT OF STORY

BOB MOON: There was a stunning number out today from the Organization for Economic Cooperation and Development, the OECD, which rattled investors from the start. The international economic watchdog warned that overall subprime lending losses could feasibly hit between 200 and 300 billion dollars.

Al Goldman is chief market strategist at AG Edwards, one of the underwriters of this program. He told us all this gloomy talk didn't help the markets today.

AL GOLDMAN: Everyone's feeling very nervous and frankly frightened. And they didn't need any more negative comments but they got them. And they didn't like it.

There's one number that was up more than usual in pre-holiday trading. Volume approached 1.4 billion shares today. Apparently traders didn't want to get caught holding the bag, and Goldman says the fact that stocks were down today is unusual, too.

GOLDMAN: In the last nineteen years only for times has the market not been up, in and around the Thanksgiving holiday. So we're not starting that pattern very well.

BOB MOON: Given the grim news that shook up investors today, we wondered if those huge mortgage-market losses are now a foregone conclusion, or if there's anything that might be done to ease the pain at least somewhat. Hugh Johnson is chief investment officer at Johnson-Illington Advisors. Thanks for joining us.

HUGH JOHNSON: Nice to be with you.

MOON: So, you know I hear that old saying, you know "a billion here a billion there, pretty soon it adds up to real money." But when the OECD talks about possible subprime losses between 200 and 300 billion dollars, it seems to me that's a pretty big spread there. How do we come in at the lower end of that spread?

JOHNSON: Well, I think a little luck and we'll be at the lower end. It's very very hard to estimate what the extent of the losses is going to be. Whether it's banks or large financial institutions that invested in mortgage-backed securities, all of this will just simply unfold gradually over the next year or two and we'll find out what the extent of the losses is. But, one thing that seems to be happening is that the estimates of the losses, whether it's 200 or 300, continue ot go up, or get higher and higher with every passing day. In other words, the damages are very severe, whether we're talking about U.S. banks and institutions or global banks and institutions.

MOON: OECD said today that the ultimate size of the subprime losses and their impact on financial institutions will depend on interest rates in part. Is there a chance that if interest rates tend to trend lower, that that could mitigate the problem here.

JOHNSON: It could mitigate the problem considerably. Now the real question obviously turns on not only what will Federal Reserve policy be or the central bank policy around the world, and if the Federal Reserve did lower short term interest rates, that might help because it would be a stimulus to the economy and therefore the impact of the problems in the credit markets and housing might be mitigated to some extent.

MOON: Would that help in terms of some of these adjustable rate mortgages, that they wouldn't be adjusting up quite so high?

JOHNSON: You bet. If short term interest rates do come down that might make the problem a little bit easier to deal with and then the losses may not be as severe.

MOON: Well, if lower interest rates would help, what about the idea that's being floated in some quarters, of temporarily freezing interest rates to help borrowers pay their mortgages? Would that just build up the pressure in the pipeline, or would that help?

JOHNSON: I do think so. Yeah, I think that builds up the pressure in the pipeline. That's one problem. but the other problem of course is that it starts a precedent of coming to the rescue, which carries with it significant problems down the road.

MOON: Mr. Johnson we've spoken in the past. I think that I've known you to be a pretty optimistic guy. How do you feel about where this is all headed?

JOHNSON: I'm less optimistic than I was. You know I've been at this for a very very long time and it's a real mistake to ignore the message of the financial markets. You need to take the message of the financial markets very seriously, and quite clearly the financial markets are saying the Fed's a little bit on the optimistic side. So, I side with the message of the financial markets, and that's after being at this for a very long time.

MOON: Hugh Johnson is chief advisement officer at Johnson-Illington Advisors. Thank you for joining us.

JOHNSON: My pleasure.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.

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