U.S. Treasury Secretary Henry Paulson Jr. played down the subprime market fallout Tuesday, saying it won't affect the broader credit markets. He said the housing slowdown had impacted certain types of mortgages, but did not see it as a major problem: "Some of the credit issues are there, but they're largely contained." He also was upbeat about global economic conditions: "Economies are growing, inflation is low, and liquidity is high." Subprime lender shares rebounded, with New Century (hardest hit Monday with a 68% drop) recovering 10%. Aiding the rally, Citadel Investment Group outbid Credit Suisse Group to buy ResMae Mortgage Corp for $180 million, and some subprime lender stock shorters closed out their positions. Separately, Fed chief Ben Bernanke told Congress yesterday that the largest U.S. mortgage brokers Fannie Mae and Freddie Mac's huge debt could destabilize the overall economy if not hedged against further risks. He suggests limiting their holdings, and linking them to a “measurable public purpose, such as the promotion of affordable housing.” HSBC, the #1 subprime lender, has set aside billions for subprime defaults; yesterday Lehman analyst Brian Johnson wrote in a research report that GMAC, the mortgage subsidiary of General Motors, may take a $1 billion charge in anticipation of defaults on its subprime loans.
Sources: Bloomberg I, II, III , IV • Washington Post • MarketWatch • Newsday
Commentary: Tells I'll Be Watching This Week • Stifel: Subprime Mortgage Sector in 'Downward Spiral' • Asset-Backed Insecurities: Containing the Subprime Mortgage Collapse
Stocks/ETFs to watch: New Century (NEW), Freddie Mac (FRE), Fannie Mae (FNM), General Motors Corp. (NYSE:GM), Credit Suisse Group (NYSE:CS). Subprime lenders: NovaStar Financial (NFI), Accredited Home Lenders (LEND), Fremont General (FMT), Countrywide Financial (CFC), Citigroup (NYSE:C), H&R Block (NYSE:HRB), Wells Fargo (NYSE:WFC), Washington Mutual (NYSE:WM). ETFs: PowerShares Dynamic Banking (NYSEARCA:PJB), streetTRACKS KBW Bank (NYSEARCA:KBE)
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