But do the pensioners, and others who lost though no fault, avarice or hubris of their own deserve to lose money?
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Poole Says Subprime Investors Deserved to Lose Money (Update2)
By Craig Torres and Anthony Massucci
July 20 (Bloomberg) -- Federal Reserve Bank of St. Louis President William Poole said investors who lost money buying subprime mortgage-linked securities got what they deserved.
Poole chastised the underwriting standards and interest-rate assessments of Wall Street and endorsed the Fed's steps to strengthen consumer safeguards. His remarks come after Chairman Ben S. Bernanke committed to tougher rules to protect consumers during his semiannual monetary policy testimony this week.
``The punishment has been meted out to those who have done misdeeds and made bad judgments,' Poole told reporters in St. Louis after a speech on the market for mortgages to borrowers with sketchy or weak credit histories. ``We are getting good evidence that the companies and hedge funds that are being hit are the ones who deserve it.'
Poole said that the meltdown isn't spreading to the broader financial services industry. His confidence didn't prevent Treasury notes extending their rally, pushing the yield on the benchmark 10-year note to a six-week low.
Investors have also dumped stocks because of spreading defaults on mortgages. Some 86 of 92 financial companies in the Standard & Poor's 500 Index were lower today, helping push the S&P down 0.9 percent to 1,538.31 at 3:22 p.m. in New York.
A so-called ABX index based on derivatives linked to subprime mortgage securities has fallen by more than 50 percent since January, suggesting a similar decline in the prices of such bonds. Another ABX index suggests declines of percent in the value of AAA rated subprime securities.
Critical of Fed
Members of Congress have criticized the Fed for lax supervision as borrowers took on $2.8 trillion of home loans between 2004 and 2006, the largest borrowing binge on record. Bank regulators, including the Fed, published unenforceable guidance during that period and disciplined few lenders.
``We need to search for ways to strengthen borrower protections without so increasing regulatory costs and risks to lenders that they withdraw from the non-prime market,' Poole told the St. Louis Association of Real Estate Professionals. ``Regulators need to be creative and not necessarily inactive.'
Poole, 70, discussed the U.S. economy briefly with reporters after his speech, and said inflation expectations ``seem to be well controlled.'
No `Widespread' Increases
Business cost pressures are ``not triggering widespread wage and price increases,' Poole said. He added that he is watching expectations, measured by yield differences on Treasury notes and government inflation-indexed bonds. If that measure rose, ``that would change my view,' he said.
The dollar's decline against other currencies can ``pressure' inflation while it isn't ``a huge influence,' Poole told reporters.
The central bank is trying to stabilize overall inflation, while tactically focusing on price measures without food and energy to discard ``the noise' of temporary price movements, Poole said. He said his preference range for core inflation is 1 percent to 2 percent.
Bernanke, 53, took the unusual step of devoting about half of his testimony on the economy to consumer protection and said the central bank would adopt a rule to restrict or ban certain practices later this year.
Subprime `Isolated'
Poole told reporters that problems in subprime markets ``remain isolated' and aren't likely to contaminate the U.S. banking system where capital is ``strong' and involvement in subprime lending is ``limited.'
One day prior to Bernanke's appearance before the House Financial Services Committee, regulators announced a joint initiative with state officials to help police lightly supervised non-bank financial companies.
``I find it odd that apparently sophisticated investors in non-prime mortgage-backed securities now claim surprise that many non-prime adjustable-rate mortgage borrowers are facing payment shock because of the increase in short-term interest rates,' Poole said. ``Mortgage originators persuaded many relatively unsophisticated borrowers to take out these mortgages.'
Bernanke told a Senate panel yesterday that the credit losses associated with subprime mortgages are ``fairly significant,' with estimates of losses reaching from $50 and $100 billion.
Subprime-mortgage foreclosures are hurting companies that bet big on the loans.
Bear Stearns
Bear Stearns Cos. was forced to infuse $1.6 billion into one of its hedge funds due to subprime losses, the biggest hedge-fund bailout since the collapse of Long-Term Capital Management LP in 1998. Caliber Global Investment Inc., a $908 million fund listed in London, closed last month because of losses on U.S. subprime home loans.
At least 60 mortgage companies, including New Century Financial Corp., which was the largest independent U.S. lender to subprime borrowers, have halted operations, gone bankrupt or sought buyers since the start of 2006, according to Bloomberg data.
``It is terribly important that we do not have bailouts,' Poole told reporters. ``If you make some bad bets, you take these losses. That is what investors in these hedge funds should be aware of.'
Moody's has lowered ratings on $5 billion of subprime mortgage bonds and said it may cut ratings on $5 billion of collateralized debt obligations that are backed by the securities. Standard & Poor's cut ratings on $6.39 billion of bonds, and Fitch Ratings said it may cut $7.1 billion of the securities on expectations home-loan defaults will go up.
The St. Louis Fed president told reporters that high inventories of unsold homes are likely to suppress home building and foreclosures are likely to increase as rates on 2006 home loans reset.
Poole voted with all other members of the Federal Open Market Committee last month to leave the benchmark lending rate at 5.25 percent.
Poole is a former economics professor at Brown University in Providence, Rhode Island. He joined the St. Louis Fed as its president in 1998.
To contact the reporters on this story: Craig Torres in Washington at Ctorres3@bloomberg.net ; Anthony Massucci in St. Louis at amassucc@blooomberg.net
Last Updated: July 20, 2007 15:44 EDT |
