How Do You Know When An Empire Is About to Crumble?

It's citizens, after years of global dominance and ridiculous excess, lose their minds and degenerate into rambling idiots...

Analysis of Bush's Housing Proposal

This analysis of Bush's housing "bailout plan"by Michael Shedlock is hilarious and right on point.

Bush Moves to Aid Lenders

Brilliant!

Bush to The Rescue!

Bush has come up with a plan to save all the homeowners that were "victimized" by predatory lenders and greedy real estate agents. Now that the housing bubble is blowing up, despite Bush's assurances that all will be fine, Bush is trying to find a way to save:

1) Homeowners
2) Banks and
3) Speculators

In other words, the Government will always be there to save you if you make a financial mistake. You are never responsible for your actions. The U.S., which is already heading for bankruptcy, according to Comptroller General David Walker, will just take on more debt to save homeowners from the consequences of irresponsible borrowing/lending practices. There is a limit to this bailout, of course, and it could quite possibly be simple political posturing that has no real chance of passing into law which would reflect poorly on the Democrats.

Bush Moves to Aid Homeowners

President Bush, looking for ways to respond to the subprime-mortgage crisis, will outline a series of policy changes and recommendations today to help borrowers avoid default, senior administration officials said.

Among the moves will be an administrative change to allow the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, to guarantee loans for delinquent borrowers. The change is intended to help borrowers who are at least 90 days behind in payments but still living in their homes avoid foreclosure; the guarantees help homeowners by allowing them to refinance at more favorable rates.

Mr. Bush also will ask Congress to suspend, for a limited period, an Internal Revenue Service provision that penalizes borrowers who refinance the terms of their mortgage to reduce the size of the loan or who lose their homes to foreclosure. And he will announce an initiative, to be led jointly by the Treasury and Housing and Urban Development departments, to identify people who are in danger of defaulting over the next two years and work with lenders, insurers and others to develop more favorable loan products for those borrowers.

The moves are the first visible steps the Bush administration has taken to help stem the fallout from the subprime crisis, which has roiled financial markets and threatened to contaminate the housing sector. Defaults and foreclosures are increasing as borrowers -- many of whom got interest-only or no-money-down loans -- begin having trouble making their mortgage payments as higher rates kick in. Many homeowners believed they could refinance their loans, but that has become much harder as lenders tighten their standards in the face of defaults and foreclosures.

With more than two million loans expected to adjust to higher rates over the next two years, possibly triggering many more defaults, the Bush administration is looking for ways to stem the damage.

"The president wants to see as many homeowners who can stay in their homes with a little help be able to stay in their homes," a senior administration official said. "We're not looking for an industry bailout or a Wall Street bailout. The focus here is on the homeowner."

Mr. Bush is instructing Treasury Secretary Henry Paulson to look into the subprime problem, figure out what happened and determine whether any regulatory or policy changes are needed to prevent a recurrence.

I can recommend a blog or two for Paulson to read that predicted this fallout was coming two years ago. It's too bad that Bush is not very computer literate or familiar with "The Internets".

Suzanne Researched This!...Husband Has Meltdown!

This is what happens when you make the biggest financial decision of your life based on emotion. This is the other side of "Keeping up with the Jones". This is the bitter pill that needs to be swallowed during the housing bubble hangover. This is the end result of "Suzanne Researched This" which is, in my opinion, the best explanation for the housing bubble. You can put that commercial in the time capsule to explain this period of time to future generations. If you haven't seen the commercial, I've re-posted it below the Dr. Laura phone-in call.


powered by ODEO

I wonder where Suzanne is hiding.

Prechter: Why the Fed Will Not Stop Deflation

Excellent Article!

Why the Fed Will Not Stop Deflation

Never Say Never Again!

This article reminds me of the horrible Bond movie "Never Say Never Again". Sean Connery had relinquished his role of James Bond to Roger Moore and stated that he would never make another Bond movie again. Of course, he did, and they aptly named it "Never Say Never Again". Federal Housing Agencies are going to report the first national decline in median housing prices since they started keeping track in 1950. This is happening despite assurances from Alan Greenspan, Ben Bernanke, David Lereah (okay, he doesn't count) that we have never seen a decline in median prices nationwide. FYI, we've never seen such a ridiculous housing bubble with such horrific, non-existent lending standards that made this possible. So the next time someone says that something has never happened, please remind them that it doesn't mean that it can't happen!

Drop Foreseen in Median Price of U.S. Homes

The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950.

Economists say the decline, which could be foreshadowed in a widely followed government price index to be released this week, will probably be modest — from 1 percent to 2 percent — but could continue in 2008 and 2009. Rather than being limited to the once-booming Northeast and California, price declines are also occurring in cities like Chicago, Minneapolis and Houston, where the increases of the last decade were modest by comparison.

The reversal is particularly striking because many government officials and housing-industry executives had said that a nationwide decline would never happen, even though prices had fallen in some coastal areas as recently as the early 1990s.

While the housing slump has already rattled financial markets, it has so far had only a modest effect on consumer spending and economic growth. But forecasters now believe that its impact will lead to a slowdown over the next year or two.

In recent years, many families used their homes as a kind of piggy bank, borrowing against their equity and increasing their spending more rapidly than their income was rising. A recent research paper co-written by the vice chairman of the Federal Reserve said that the rise in home prices was the primary reason that consumer borrowing has soared since 2001.

Now, however, that financial cushion is disappearing for many families. “We are having to start from scratch and rebuild for a down payment,” said Kenneth Schauf, who expects to lose money on a condominium in Chicago he and his wife bought in 2004 and have been trying to sell since last summer. “We figured that a home is the place to build your wealth, and now it’s going on three years and we are back to square one.”

On an inflation-adjusted basis, the national median price — the level at which half of all homes are more expensive and half are less — is not likely to return to its 2007 peak for more than a decade, according to Moody’s Economy.com, a research firm.

Unless the real estate downturn is much worse than economists are expecting, the declines will not come close to erasing the increases of the last decade. And for many families who do not plan to move, the year-to-year value of their house matters little. The drop is, of course, good news for home buyers.

It does, however, contradict the widely held notion that there is no such thing as a nationwide housing slump. A 2004 report jointly written by the top economists at five organizations — the industry groups for real estate agents, home builders and community bankers, as well as Fannie Mae and Freddie Mac, the large government-sponsored backers of home mortgages — was typical. It said that “there is little possibility of a widespread national decline since there is no national housing market.”

Top government officials were more circumspect but still doubted that the prices would decline nationally. Alan Greenspan, the former Fed chairman, said the housing market was not susceptible to bubbles, in part because every local market is different.

In 2005, Ben S. Bernanke, then an adviser to President Bush and now the Fed chairman, said “strong fundamentals” were the main force behind the rise in prices. “We’ve never had a decline in housing prices on a nationwide basis,” he added.

US could be heading for recession

Uh-oh! They're starting to use the "R" word. Yes, the dirtiest word in finance is rearing its ugly little head as the entire world embraces the full ramifications of the "innovative financial instruments" that have proliferated through this debt-driven bull market. As this ugliness unfolds, economists, analysts, and money managers all scratch their heads wondering how this all happened as they continue to insist that macroeconomic factors "don't matter". They point to corporate earnings and individual company fundamentals as the only things that matter. Guess what? When corporate profits are driven by record consumer debt and then credit markets unravel, macro factors matter.

Ex-Treasury Secretary Summers warns of risks 'greater than any since aftermath of 9/11', reports Ambrose Evans-Pritchard

Former US Treasury SeFcretary Larry Summers warned that the United States may be heading into recession as the biggest victim to date of the sub-prime mortgage debacle was humiliatingly sold for a token sum in Germany.

Traders are braced for another week of turmoil after the near breakdown of America's $2,200bn (£1,100bn) market for commercial paper.

"It would be far too premature to judge this crisis over," Mr Summers said. "I would say the risks of recession are now greater than they've been any time since the period in the aftermath of 9/11."

In Germany, it emerged that the state-bank SachsenLB may have accumulated $80bn of exposure to risky assets through a set of Irish funds kept off balance sheet.

Stock markets rallied strongly late last week on the belief that the Federal Reserve would start to cut its key lending rate in September, and that the European Central Bank would refrain from further tightening. Goldman Sachs said any hint the banks may prove more hawkish could quickly dampen investor spirits again, warning it was too early to give "all clear" on equities.

Federal Reserve data shows that the outstanding stock of US commercial paper has fallen by $255bn over the last three weeks, a sign that borrowers have been unable to roll over huge amounts of debt. The fall is comparable to the sudden shrinkage that occurred at the onset of the dotcom bust, and may have the effect of draining liquidity.

The New York Fed issued a statement on Friday stressing that asset-backed commercial paper (ABCP) would be accepted as collateral for loans to banks from the discount window. The move has helped trim the average yield slightly to 6.04pc, helping to calm a key part of the money market that lubricates the financial system.


Even so, the cost of this credit is still up roughly 80 basis points since late July - for those borrowers who can obtain it at all. Bill Gross, head of the US bond-giant PIMCO, said parts of the commercial paper industry were now so discredited that it may be impossible to revive them.

A string of Germany banks have run into trouble after taking leveraged bets on CDOs and the even more deadly 'synthetic' or derivative CDOs - bond-like securities that often contain slices of US mortgage debt.

The scale of carnage in Europe explains the series of emergency actions by ECB, which injected a further $85bn in liquidity through various mechanisms last week. IKB was the first German bank to crumble earlier this month, requiring an €8.1bn state-rescue just days after it denied any significant exposure to sub-prime debt.

CDO Insiders: "We Knew We Were Buying Time Bombs"

If you want to know how this subprime mess spread and how financial institutions, hedge funds, pension funds were so stupid to not know that there was a problem with CDO's you have to read this gem article from The Big Picture. This e-mail was sent to Barry Ritholz to highlight how CDO's proliferated, despite the obvious risk. In the end, it's always about greed folks. Greed is the main motivator and it doesn't matter who get's hurt when the music stops.

1. XXXXXX and I were talking in 2003 about how shaky these low FICO, high LTV, 2/28 ARM's that were being created were. People in the know knew then those loan products were going to be a problem in the future. Way back in 2003, it didn't make sense.

2. In early '05, XXXXXX tried to hook me up with a HF he knew that wanted to play the CDO issuer game. I talked to the guy and told him that at the risk of talking them out of hiring me, I wouldn't do it. I thought that game was topped-out even back then. A bit early, but perhaps the right call.

3. I was talking to CDO managers in mid-'05 that were saying how rich sub-prime MBS was and how wrong everyone was for buying that stuff at the spreads they were. To a man, they all agreed they were paying too much for the risk, they all believed that HPA [ED: home price appreciation] was going negative soon. But, sadly, they had to buy the stuff because they needed to accumulate collateral for their CDO issuance. F**k, we all knew we were overpaying, even back in 2005. We knew it was essentially a bet that home price appreciation was going to continue at levels that couldn't be sustained. No way that could keep going on.

Everyone was saying the same thing: Home pricing cannot continue appreciating at the same rate, and the second this thing turns, we are F***ED.

Is it really any surprise to anyone that the mortgage business got too far ahead of itself? To me, the only surprise has been it took so long for all of this to happen."

So what was the prime motivating factor?:

"The answer is quite simple: DEAL FEES. I gotta keep buying collateral, in order to keep issuing these transactions as a CDO manager. Its my job: I gotta keep accumulating collateral, and I gotta issue the liability against that collateral.

In 2005, we all said "I hate the real estate market, I hate the credit spread, but my job is to keep doing this: Buying Collateral and issuing CDOs. Everyone was the buying this shit to do any deal. The greed went thru the whole chain, from the home owner buying a property they couldn't afford right up to the CDO manager buying subprime paper."

Why did these managers keep buying this bad junk?:

"Well, nothing is "bad junk" -- it's just priced wrong. No one believed the under-performance of these MBS loan pools would ever be so severe. Everyone knew in the back of their minds that the possibility existed, as did the possibility that residential real estate prices would move LOWER someday.

But no one wanted to be the first to acknowledge it fearing that they'd miss the opportunity to participate in big fees, big alpha, etc. . . ."

Dennis Gartman: Short Stocks, Long Gold

Investment legend Dennis Gartman weighed in on the recent market weakness, the Fed actions, the prospects for stocks and the reason why he loves gold. Here are some excerpts from the interview:

They've signaled now that when they meet in September they will vote to move the Fed fund rate down for the first time in a very, very long time and it's long overdue. What I've learned in a mere 35 years of watching the Fed is that when the Fed changes direction it moves in that new direction for a long period of time and takes rates much farther than anyone wants to anticipate.

Will they move in December? That's not the important question.

The important question is that their next move, after they ease rates in September, will be to ease again. The move after that will be to ease again and the move after that will be to ease again. You can rest reasonably assured that the Fed funds rate will be markedly lower a year from now than it is now.

Right now I am short of stocks, and got that way yesterday, and I am long of gold, and I intend to stay that way. I think the Fed has responded to disconcerting economic news by easing monetary policy and that disconcerting news in the mortgage market is not going to go away anytime soon.

A 25, 50, 75, or 100 basis point decline in Fed funds is going to be a very immaterial consequence to the reset home mortgage owner who's watching his teaser rate go from say, three percent to eight percent. Maybe it goes from three percent to seven percent, but that's not going to stem a large sum of foreclosures in the mortgage market next year.

The Fed has a big job ahead of it to take care of that problem.

I've been bullish on gold for some period of time simply because of reserve adjustments by the Central Bank of China and the Central Bank of India, Thailand, and Malaysia, all of whom are running large trade surpluses. They find themselves with rather more reserves of euros and dollars than they would like and rather fewer reserves of gold than those held by the central banks of the industrialized world, so they're going to be moving in that direction.

Brilliant Economists Can't Figure It Out

Barron's Weighs In On The Mortgage Mess

From W.C. Varone's Blog:

It was all a big scam to unload garbage loans on stupid foreigners. Randall Forsyth explains:

How did this all come about? A (bearish) hedge-fund operator, in a letter to his investors, describes how a senior Wall Street marketing director recounted the genesis of the current situation:

"'Real money' (U.S. insurance companies, pension funds, etc.) accounts had stopped purchasing mezzanine tranches of U.S. subprime debt in late 2003 and [Wall Street] needed a mechanism that could enable them to 'mark up' these loans, package them opaquely, and EXPORT THE NEWLY PACKAGED RISK TO UNWITTING BUYERS IN ASIA AND CENTRAL EUROPE!!!!

"He told me with a straight face that these CDOs were the only way to get rid of the riskiest tranches of subprime debt. Interestingly enough, these buyers (mainland Chinese banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, U.K. banks) possess the 'excess' pools of liquidity around the globe. These pools are basically derived from two sources: 1) massive trade surpluses with the U.S. in U.S. dollars, 2) petrodollar recyclers. These two pools of excess capital are U.S. dollar-denominated and have had a virtually insatiable demand for U.S. dollar-denominated debt... until now."

These investors then had standing orders on Wall Street desks for any U.S. debt rated triple-A. Through the "alchemy of CDOs" and "the help of the ratings agencies," the CDO managers collected triple-B and triple-B-minus subprime and repackaged them so the top tier got paid out first. Then leverage the lower mezzanine tranches by 10-20 times and, "POOF... you magically have 80% of the structure rated 'AAA' by the ratings agencies, despite the underlying collateral being a collection of BBB and BBB- rated assets."

The letter concludes: "This will go down as one of the biggest financial illusions the world has EVER seen."

Helicopter Ben!

Now that "Helicopter Ben" has sprung into action, he really is deserving of his own action figure.



In 2002, when the word "deflation" began appearing in the business news, Bernanke gave a speech about deflation. In that speech, he mentioned that the government in a fiat money system owns the physical means of creating money. Control of the means of production for money implies that the government can always avoid deflation by simply issuing more money. (He referred to a statement made by Milton Friedman about using a "helicopter drop" of money into the economy to fight deflation.) Bernanke's critics have since referred to him as "Helicopter Ben" or to his "helicopter printing press". In a footnote to his speech, Bernanke noted that "people know that inflation erodes the real value of the government's debt and, therefore, that it is in the interest of the government to create some inflation."(source Wikipedia)

Understanding the Fed Rate Cut

Great Flow Chart from Plexus Asset Management.

FOMC Statement: 50 BP Discount Window Rate Cut

Wasn't Jim Cramer begging the fed to open the discount window two weeks ago to "cut the rate" and "relieve the pressure"? It appears that Bernanke is accomodating the "market movers" and doing exactly what was ordered.

For immediate release:

To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility. The Board approved a 50 basis point reduction in the primary credit rate to 5-3/4 percent, to narrow the spread between the primary credit rate and the Federal Open Market Committee's target federal funds rate to 50 basis points. The Board is also announcing a change to the Reserve Banks' usual practices to allow the provision of term financing for as long as 30 days, renewable by the borrower. These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially. These changes are designed to provide depositories with greater assurance about the cost and availability of funding. The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets. Existing collateral margins will be maintained. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York and San Francisco.

Release Date: August 17, 2007

Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.

Voting in favor of the policy announcement were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Richard W. Fisher; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Michael H. Moskow; Eric Rosengren; and Kevin M. Warsh.

A Rush to Pull Out Cash

This is when things turn really ugly, when all confidence in the banks begins to falter due to horrendous lending practices and subprime mortgage exposure. A run on the banks was inevitable and the fed is scrambling to "contain" the fear that is spreading like wildfire.

Anxious customers jammed the phone lines and website of Countrywide Bank and crowded its branch offices to pull out their savings because of concerns about the financial problems of the mortgage lender that owns the bank.

Countrywide Financial Corp., the biggest home-loan company in the nation, sought Thursday to assure depositors and the financial industry that both it and its bank were fiscally stable. And federal regulators said they weren't alarmed by the volume of withdrawals from the bank.

The mortgage lender said it would further tighten its loan standards and make fewer large mortgages. Those moves could make it harder to get a home loan and further depress the housing market in California and other states.

The rush to withdraw money -- by depositors that included a former Los Angeles Kings star hockey player and an executive of a rival home-loan company -- came a day after fears arose that Countrywide Financial could file for bankruptcy protection because of a worsening credit crunch stemming from the sub-prime mortgage meltdown.

The parent firm borrowed $11.5 billion Thursday by using up an existing line of credit from 40 banks, saying the money would help the lender meet its funding needs and continue to grow. But stock investors, apparently alarmed that the company felt compelled to use the credit line, sent Countrywide's already battered stock down an additional 11%.

At Countrywide Bank offices, in a scene rare since the U.S. savings-and-loan crisis ended in the early '90s, so many people showed up to take out some or all of their money that in some cases they had to leave their names.

In West Los Angeles, a Countrywide supervisor brought in from another office served coffee to more than 25 people waiting calmly for their turn with the one clerk who could help them.

Bill Ashmore drove his Porsche Cayenne to Countrywide's Laguna Niguel office and waited half an hour to cash out $500,000, which he then wired to an account at Bank of America.

"It's because of the fear of the bankruptcy," said Ashmore, president of Irvine's Impac Mortgage Holdings, which escaped bankruptcy itself recently by shutting down virtually all its lending and laying off hundreds of employees.

"It's got my wife totally freaked out," he said. "I just don't want to deal with it. I don't care about losing 90 days' interest, I don't care if it's FDIC-insured -- I just want it out."
Customers, most of whom said they were acting just in case, said they went to the lightly staffed branches because they couldn't get through to the bank via its toll-free number or its slow-moving website.

"I doubt it will go under, but I want to protect myself," said Rogie Vachon, who was the Kings' most valuable player for several years in the '70s. Vachon said he went to the West L.A. branch to withdraw some money because his account balance exceeded the limit on insurance provided by the Federal Deposit Insurance Corp.

August 16, 2007

Countrywide Bets The Farm

Quote of the Day: Moral Hazard

The Meaning of Jim Cramer's Rant

This is an excellent review of Jim Cramer's rant and an attempt to interpret what he was really saying. Cramer has always been a market pumper and denied the existence of the housing bubble until recently, but in a rare moment of panic, he went into CYA mode and warned the public of the looming market meltdown. He later stated that he wanted to be "on the record" so that he could have a clear conscious if and when the devastation occurs. In other words, he pumped the market all the way up, denied the existence of the housing bubble and the credit problems in the market, then at the end when it started to unravel, he screamed for help from the Fed to try and save his rich friends! Thanks for the timely advice Jim!



You can see the original rant here.

You can see his denial of the housing bubble here.

Weekend Article Links

Housing 2007 = Stocks 1929

Fed Adds $38 Bln in Funds, Most Since September 2001

Dorsch: Plunge Protection Team Working Overtime

A New Kind of Bank Run Tests Old Safeguards

America follows Japan's misguided path

Great article by Bill Fleckenstein! The Japan comparisons have been dismissed for years but the similarities between the fates of both country's economies are becoming clearer every day.

Some investors have been getting rich, but a pileup of bad debts will weaken the U.S. economy and its stock and real-estate markets, echoing the Asian nation's travails of the 1990s.

Taking a big step back, the Bank of Japan acted foolishly throughout the 1980s, which caused that country to experience enormous real-estate and stock bubbles. Japan's stock bubble was really a residue of its real-estate bubble -- actually a credit bubble, as the banks lent money to any corporation with a pulse. (Does that sound familiar?)

Then the institutions that lent the money took forever to write off the bad loans. That's why Japan's real-estate market, stock market and economy did so poorly for more than a decade.

Here's why that matters to us, other than for the lesson it offers on bubbles (which our Fed has been unable to learn): After Japan's problems, that nation's central bank kept interest rates at virtually zero for the better part of a decade. That essentially-free money has been part of the reckless lending and misallocation of capital that has proliferated around the planet.

I'm not going to recount all the mistakes made by Greenspan that precipitated the late-1990s equity bubble -- which, suffice to say, was the biggest our country has ever seen.

After that bubble, Greenspan took a page out of the Bank of Japan's book and lowered rates to 1%. That helped precipitate the housing bubble here that ended in 2005.

As to why the unwinding has taken so long to commence, only recently has the cause become clear: the mark-to-model fantasy employed by those who have bought the sliced-and-diced mortgage paper.

But the fantasy is unraveling as these structured-credit products are now slowly being marked to market. Just as virtually every subprime-mortgage lender has blown up, Alt-A lenders (the next rung up the ladder creditwise) will blow up -- and, ultimately, many hedge funds will blow up, though we're in the early days of that process.

In the years since our equity bubble peaked, trillions of dollars' worth of debt have piled up throughout corporate America. So now, as we enter recession, we will experience not just a weak economy, real-estate market and stock market, but the exacerbating effect of a mountain of bad debt, completing the analogy to Japan of the 1990s.

Dow sees 2nd worst day of '07

Credit fears send stocks tumbling, with the industrials posting its biggest one-day point loss since February; bond prices surge in 'flight-to-quality' move.

The Dow Jones industrial average (down 387.18 to 13,270.68, Charts) tumbled 387 points, or 2.8 percent, its biggest one-day point and percentage loss since Feb. 27, when it plunged 416 points on worries about a global growth slowdown.

The blue-chip barometer had opened weakly on Thursday, briefly pared some losses in the morning after the New York Stock Exchange instituted trading curbs, but then resumed its downward path.

The broader S&P 500 (down 44.40 to 1,453.09, Charts) index dropped almost 3 percent. The tech-fueled Nasdaq Composite (down 56.49 to 2,556.49, Charts) index fell nearly 2.2 percent.
Two Goldman funds hit the skids

Fears about the subprime mortgage market and the credit crisis resurfaced Thursday after BNP Paribas, France's biggest bank, said it was halting withdrawals from three of its top funds because it can't value their assets in the current market.

Additionally, AIG, one of the world's largest insurance companies, warned Thursday morning that it is seeing mortgage delinquencies spreading from subprime to prime. The company also reported higher-than-expected quarterly earnings late Wednesday. AIG (down $2.18 to $64.30, Charts, Fortune 500) lost 2.5 percent, recovering from a 5 percent plunge at the open.

The news sent stocks tanking, however, equities were already vulnerable to a decline, following a robust three-day market surge earlier this week, that followed a big selloff.

"We had a market that was deeply oversold, had an enormous rebound, and then was vulnerable to a setback," said Steven Goldman, market strategist at Weeden & Co. "Today's news is acting as a catalyst for that setback."

Seeking to calm credit worries, the European Central Bank (ECB) added cash to money markets. However, the move seemed to have the opposite effect, increasing investor concerns rather than easing them.

The ECB loaned at least $130 billion in overnight funds to banks at a 4 percent rate. The Federal Reserve added $24 billion to temporary U.S. reserves in its regular overnight operations, an amount that some traders said was larger than usual, but not comparable to an infusion of money along the lines of the ECB, Reuters said.

Stocks have seesawed dramatically over the last few months on worries about the tightening of credit after a period of widespread liquidity. The continued fallout from the subprime mortgage market - loans made to consumers with less than ideal credit - has been an ongoing worry on Wall Street this year, amid the slumping housing market.

China Threatens U.S. Dollar Collapse

The Chinese, aka America's Banker, are letting the U.S. know who's the boss in case they want to try and impose trade sanctions against them. It's getting interesting!

China threatens 'nuclear option' of dollar sales

The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.

Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now appears to be government policy with a comment last week that Beijing's foreign reserves should be used as a "bargaining chip" in talks with the US.

"Of course, China doesn't want any undesirable phenomenon in the global financial order," he added.

He Fan, an official at the Chinese Academy of Social Sciences, went even further today, letting it be known that Beijing had the power to set off a dollar collapse if it choose to do so.

"China has accumulated a large sum of US dollars. Such a big sum, of which a considerable portion is in US treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency. Russia, Switzerland, and several other countries have reduced the their dollar holdings.

"China is unlikely to follow suit as long as the yuan's exchange rate is stable against the dollar. The Chinese central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar," he told China Daily.

The threats play into the presidential electoral campaign of Hillary Clinton, who has called for restrictive legislation to prevent America being "held hostage to economic decicions being made in Beijing, Shanghai, or Tokyo".

She said foreign control over 44pc of the US national debt had left America acutely vulnerable.

Simon Derrick, a currency strategist at the Bank of New York Mellon, said the comments were a message to the US Senate as Capitol Hill prepares legislation for the Autumn session.

"The words are alarming and unambiguous. This carries a clear political threat and could have very serious consequences at a time when the credit markets are already afraid of contagion from the subprime troubles," he said.

A bill drafted by a group of US senators, and backed by the Senate Finance Committee, calls for trade tariffs against Chinese goods as retaliation for alleged currency manipulation.

Jim Cramer Meltdown

On a very bad day for the markets, Jim Cramer was experiencing a meltdown, live on CNBC. This is what the housing bubble bursting looks like folks. It aint pretty!



"HE HAS NO IDEA HOW BAD IT IS OUT THERE. HE HAS NO IDEA. HE HAS NO IDEA. I'VE TALKED TO THE HEADS OF ALMOST EVERY SINGLE ONE OF THESE FIRMS IN THE LAST 72 HOURS AND HE HAS NO IDEA!!!"

"AND BILL POOLE HAS NO IDEA WHAT IT'S LIKE OUT THERE!!"

"THESE FIRMS ARE GOING TO GO OUT OF BUSINESS!!!!!"

"THIS IS A DIFFERENT KIND OF MARKET AND THE FED IS ASLEEP AND BILL POOLE IS A SHAME HE'S SHAMEFUL!!!!"

"WE HAVE ARMAGEDDON"

Workers Say They Feel Blindsided by Lender’s Failure

This is the sad reality of the housing bubble. Usually, it doesn't become "real" until people start losing their jobs. Asset bubbles always end this way but this one will be different than most because so many people were connected to housing in so many industries. The exposure is significantly worse than the tech bubble bursting in 2000. You can expect more headlines like this in the coming months.

MELVILLE, N.Y., Aug. 3 — Among the 1,400 or so people who lost their jobs here Friday, there were undoubtedly some who understood the macro and micro factors that led American Home Mortgage Investment Corporation, one of the largest and fastest-growing mortgage companies in the country, to crash in a heap this week, even as it was hiring employees by the dozen.

But most of the workers carrying rubber plants and boxes of family photos out of the company’s headquarters were account clerks, appraisers, computer technicians and loan brokers who said they were stunned to find themselves, some after years of employment, on the street with virtually no notice.

“You don’t think you’re in the slaughterhouse, and then suddenly something hits you on the back of the head and you find yourself rolling down the conveyer belt,” said Frank Caltabellotta, 42, of West Islip, an appraisal specialist who was laid off. “The way this happened was very undignified.”

On Thursday, company officials notified all 7,000 employees in a dozen offices around the country, including the 1,400 here, that all but a skeleton crew of about 750 workers nationwide would be immediately laid off and that loan operations would be shut down.

Michael Strauss, the chief executive, attributed the company’s undoing to the weakening of the real estate market and of the secondary mortgage market, the commerce in financial instruments built from bundled mortgage obligations, which was American Home Mortgage’s specialty.

American Home Mortgage traded in loans that fell into the category between low-risk and high-risk. Many were “stated income” mortgages — variable rate and zero-money-down loans that require no income verification. Borrowers in that group are especially hard hit when market-rate interest payments come due on their loans.

But Blanca Castillo, who worked for three years as a call center coordinator, said the events that may have contributed to her unemployment were no excuse for the sudden and careless shedding of a loyal work force.

“Monday, there were rumors,” Ms. Castillo said as she carried a cardboard box to her car, passing several potted plants that sat on the roof of another employee’s car. “Tuesday, they say not to worry about the rumors. Thursday, we’re finished. They are giving us nothing — no health benefits, no severance package, nothing. We have families, we have mortgages. That’s it? Here’s your last paycheck, goodbye?”

A spokesman for American Home Mortgage could not be reached for comment. E-mail queries and telephone calls were not answered.

Throughout the day, which for just about everyone was spent in a kind of limbo between losing one’s job and actually leaving the building, employees huddled outside, smoking cigarettes, making cellphone calls or reading some of the fliers left on their car windshields. These mainly advertised jobs in the mortgage, debt collection and telephone sales industries. (“Top flight opportunity. We are willing to train bright, assertive persons for full and part-time positions,” said one such flier for Asset Locators and Skip Tracers, a debt collection service.)

Some of the employees seemed dazed, holding thin folders filled with information about unemployment benefits.

Christine Jackson, 25, said that besides the long-term employees — some of them with the company since it was founded in 1998 — the hardest hit among her co-workers seemed to be those who made their work cubicles into “a little home away from home.” The ones who surrounded themselves with family pictures, coffee makers and, in one case near Ms. Jackson’s cubicle, a radio tuned softly to a jazz station.

“There are people here who worked here since the beginning,” Ms. Jackson said. “They felt like this was their family.”

Shawn Nuzzo, 31, a loan sales coordinator, said he sensed a shift in the market late last year.

“Basically, the guy who puts no money down has a big incentive to walk away when interest rates go up,” Mr. Nuzzo said. “That started happening, and we made some adjustments. But obviously it was too little, too late.”