U.S. Mortgage Market Woes Spread to Europe The problems in the U.S. mortgage market have morphed into a global phenomenon and pushed stock values down around the world. Banks in France and Germany acknowledged big losses because of investment in U.S. mortgage-backed securities.
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U.S. Mortgage Market Woes Spread to Europe

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U.S. Mortgage Market Woes Spread to Europe

U.S. Mortgage Market Woes Spread to Europe

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MICHELE NORRIS, host:

Many people are still scratching their heads, not quite clear on how bad mortgages caused a sell-off in financial markets around the world. Well, a growing number of analysts say the pain is far from over; that what is happening is something called a credit crunch.

As NPR's Adam Davidson reports, that could get worse before it gets better.

ADAM DAVIDSON: Lars Christiansen was standing on a street corner in Copenhagen today. He's an analyst with Danske Bank and said all his colleagues are miserable. Most are on their way to get drunk.

Mr. LARS CHRISTIANSEN (Analyst, Danske Bank): It's pretty high. You don't have any trust in the market. And that's why we are now complete lack of trust. Pretty horrifying.

DAVIDSON: He says it's not that the bank is losing money - they're used to that. It's that the basic character of financial markets has changed in the last two days.

To understand it, let's go to Stephen Checchetti of the Brandeis International Business School. He says banks have a surprising way of making sure they have enough money to conduct business everyday. They take out these super short-term loans.

Professor STEPHEN CHECCHETTI (Global Finance, Brandeis International Business School): They finance themselves - I mean, most people will find this surprising, but large amounts - billions and billions amount of dollars overnight.

DAVIDSON: So these are like eight-hour mortgages, basically?

Prof. CHECCHETTI: It'll be like 24-hour mortgages.

DAVIDSON: Bank of America, say, might own a whole bunch of mortgages. It uses those as collateral to borrow, for example, $2 billion from Citibank for one day. Bank of America has some ready cash to give you for your car loan. Citibank makes a bit of interest. Everyone's happy - that is, until Citibank starts wondering if Bank of America really has enough collateral. What if Bank of America owns a bunch of those subprime mortgages, the ones that are worth a lot less than we thought?

Lars Christiansen.

Mr. CHRISTIANSEN: At that point, somebody will say, hey, the king has no clothes on. And that, of course, is a big risk.

DAVIDSON: The risk is that Citibank won't lend to Bank of America. Then, Bank of America can't lend to Chase and on and on. The basic system that gives banks money is broken. And of course, banks give money to everyone else. Oh, and things could be even worse. This credit crunch was sparked by fears that banks gave out too many subprime mortgages. They let broke and financially risky people buy houses.

Professor NOURIEL ROUBINI (Economics, New York University; Chairman, Roubini Global Economic Monitor): And similar kind of loosening of credit standards was occuring in the corporate sector.

DAVIDSON: Nouriel Roubini teaches economics at NYU and runs Roubini Global Economic Monitor. He says there are effectively subprime companies all over the world. These are failing firms. Normally, they'd have gone bankrupt. But just like with subprime mortgages, banks have been happy to lend to these subprime companies.

Prof. ROUBINI: So subprime is just the beginning of a more widespread and serious credit problem for the economy.

DAVIDSON: As these companies go bankrupt, the banks come under even more suspicion. It becomes even harder for banks to get those overnight loans. So is the U.S. headed for economic crisis? Maybe not. One of the oddest and perhaps cruelest ironies is that this credit crunch problem might be most painful in other parts of the world.

Danske Bank's Christiansen says there are not only subprime homeowners and subprime companies, there are subprime countries.

Mr. CHRISTIANSEN: The troubled countries are Turkey, center it in Europe in general, countries like Hungary, Romania, Bulgaria, Iceland also, South Africa.

DAVIDSON: Eventually, next week, maybe next month, banks and others should get their confidence back, Christiansen says. They'll open the spigot, as analysts say, and start lending again. But they'll be more cautious. They'll want to stick to surer bets, so they might not lend to subprime homeowners so easily or to failing companies. But banks from all over the world will be eager to lend money to more reliable people and businesses in the U.S. But they'll keep their money out of riskier places - they won't lend to countries with lots of debt and sketchy financial systems. So this credit crunch caused by American banks and American homeowners might end up punishing Turkish farmers and Romanian handyman more than anyone.

Adam Davidson, NPR News.

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