Credit Crisis Grows As Investors Become More Risk-Averse
The credit markets came under renewed stress on Thursday as investors sought absolute safety and even moved away from debt issued by Fannie Mae and Freddie Mac, the government-sponsored mortgage lending enterprises.
The intensifying credit crisis came as one regulator, Timothy F. Geithner, the president of the Federal Reserve Bank of New York, said that some banks had moved from being too willing to take on risks to being reluctant to take any chance of losing money, a move that was making the crisis worse.
“The rational actions taken by even the strongest financial institutions to reduce exposure to future losses have caused significant collateral damage to market functioning,” Geithner said in a speech to the Council of Foreign Relations. “This, in turn, has intensified the liquidity problems for a wide range of bank and nonbank financial institutions.”
Those liquidity problems intensified Thursday as a new increase in the number of mortgage foreclosures was reported and two financial companies that had relied on borrowed money said they were unable to raise the cash demanded by their lenders.
Both Carlyle Capital, a company sponsored by the Carlyle Group, a major private equity fund, and Thornburg Mortgage, the second-largest independent mortgage lender in the United Statesafter Countrywide, said they had been unable to meet the demands and had defaulted on some obligations. Their stock prices plunged.
As the economy grew through most of this decade, much of the growth was fueled by borrowing, both by individuals taking out mortgages and by investors who sought high returns through highly leveraged investments. Some of those investments are now unraveling because lenders will not lend enough money to enable investors to hold on to them. That reluctance forces the sale of investments, which lowers prices and makes lenders even less willing to risk their capital.
“Leverage is acceptable in a stable economic environment, but not in an economic crisis,” Geraud Charpin, a strategist at UBS, wrote last week.
At the end of last year, Carlyle Capital had $21.76 billion in assets, of which $21.69 billion had been pledged as collateral against loans. It had borrowed $31 for every dollar of equity, and even a $150 million line of credit from its parent, the Carlyle Group, was not enough to keep it out of trouble as lenders demanded more collateral to back up their loans.
Fannie Mae and Freddie Mac, whose debt has been viewed as almost as safe as that of the government itself, have played an essential role in keeping the mortgage markets functioning. That is because many mortgage companies have gone out of business and investors have been unwilling to buy mortgage-backed securities unless the government, or one of the enterprises, guaranteed the mortgages.
The difference between the yield on long-term debt guaranteed by Fannie Mae and that of similar Treasury debt rose to its largest level in more than 20 years, providing a new sign of the nervousness that has affected financial markets.