Stocks sink after Fitch warns on US bank exposure

NEW YORK (AP) -- A warning from Fitch Ratings that large U.S. banks could be hit hard if Europe's debt crisis spreads sent stocks falling late Wednesday.

U.S. indexes were moving between small gains and losses before Fitch released its report around 3:15 p.m. Eastern time. The Dow was down 36 points with an hour of trading left, then plunged to end the day down 190.

Fitch, one of the three main credit ratings agencies along with S&P and Moody's, said U.S. banks could be "greatly affected" if Europe's debt crisis continues to spread beyond financially troubled countries such as Greece, Ireland and Portugal.

Large banks took a late dive. Bank of America Corp. and JPMorgan Chase & Co. each lost 3.7 percent. Goldman Sachs dropped 4.1 percent and Morgan Stanley 7.9 percent.

"This is a long-running, slow-developing story," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. U.S. stocks had rallied in the past week as new governments took over in Greece and Italy and promised to implement budget reforms. It's a familiar pattern, Ablin said. "It seems like it's always one step forward and two steps back."

The Dow Jones industrial average closed at 11,905.59, a loss of 190.57, or 1.6 percent. It was the Dow's first close below 12,000 since last Thursday.

The Standard & Poor's 500 index fell 20.89 points, or 1.7 percent, to 1,236.92. The Nasdaq composite lost 46.59, or 1.7 percent, to 2,639.61.

Concerns that the debt troubles of Greece and Italy could spread have been driving the borrowing rates of France higher on bond markets since the beginning of November.

The benchmark rate on France's 10-year bonds was just 2.54 percent on Oct. 5. It has climbed steadily since then, reaching 3.69 percent Wednesday. That's a reflection of deepening worries that France, the second-largest country in the euro bloc after Germany, could be in danger of losing its triple-A credit rating.

For the moment, Fitch said the risks to U.S. banks from Europe appeared to be "manageable." However investors have been quick to respond to headlines about how Europe's debt woes might hurt the global financial system. Fitch said the top five U.S. banks have a total of $114 billion in loans, deposits and other assets tied to French banks. French banks also have large holdings of bonds issued by Greece and Italy.

Stock indexes wavered earlier Wednesday as the price of oil crossed above $100 a barrel for the first time since July. The jump in crude prices could weaken the already U.S. fragile economy by raising costs for gasoline, heating oil and airline fuel. Oil futures surged 3 percent to $102.59 a barrel as U.S. supplies dropped and a new pipeline deal by a Canadian company threatened to cut them even more.

In corporate news, Abercrombie & Fitch Co. plunged 13.6 percent after the company reported earnings that fell far short of Wall Street's expectations. The company said rising costs for cotton and other commodities cut into profits.

Dell Inc. dropped 3.2 percent after the company said late Tuesday that its revenues will be held back by an industry-wide shortage of hard drives.

U.S. economic reports were mixed. Output at the nation's factories, utilities and mines rose at the fastest pace in three months in October, the Federal Reserve said. Production of autos and parts surged 3.1 percent.

Consumer prices held steady last month. The Consumer Price Index dropped 0.1 percent in October, led by a steep decline in gas prices. An index of builder sentiment rose to the highest level since May 2010 yet is still well below a level consistent with a strong housing market.

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Ratings agency Fitch issues warning for U.S. banks

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Fitch Ratings warned that it may reduce its “stable” rating outlook for U.S. banks with large capital markets businesses because of contagion from problems in troubled European markets.

“Unless the euro zone debt crisis is resolved in a timely and orderly manner, the broad outlook for U.S. banks will darken,” Fitch said. “The risks of a negative shock are rising.”

The warning was aimed at the entire U.S. banking sector but sent the shares of Goldman Sachs Group Inc.(GS-N95.60-4.15-4.16%) down 4.2 per cent for the day and clipped 8 per cent from the market value ofMorgan Stanley (MS-N14.66-1.27-7.97%).

On Oct. 13, Fitch placed debt ratings of seven global banks with large trading operations on negative watch. Besides Goldman and Morgan Stanley, the group includes European companies Barclays Bank PLC, BNP Paribas SA, Credit Suisse Group, Deutsche Bank AG and Société Générale SA.

U.S. banks have increased their trading operations in Europe in the past several years, while reducing their traditional lending operations, said Christopher Wolfe, one of the Fitch analysts who wrote the report. A lingering debt problem could affect bank’s capital market revenue since about one-third of it comes from European counterparties, he said.

Contagion from Europe also could impact the banks’ access to funding, he said.

U.S. banks appear to have managed their exposure to the most troubled “peripheral” European nations such as Greece and Ireland, said Joseph Scott, another author of the Fitch report, but Fitch fears that the problems now spreading to Italy could reach further into larger nations such as France and Germany where the U.S. banks are more exposed.

“Our concern is with counterparty risk, the impact of Europe on global economic growth and how that weighs on the economic recovery in the U.S.,” said Joseph Scott, one of the analysts who wrote the Fitch report.

The analysts don’t expect a resolution of the issues for another 12 months or so, and are unlikely to adjust their outlook on the sector quickly. “This is going to have a prolonged and uncertain income,” Mr. Scott said.

U.S. banks haven’t clearly disclosed the extent of their holdings of European sovereign debt or their trading positions with European counterparties, but have been reducing their direct exposure for well over a year, the report said. While net exposure appears manageable, the analysts expressed concern over the efficacy of hedges through credit default swaps.

On Sept. 21, Moody’s Investors Service lowered debt ratings for Bank of America Corp. (BAC-N5.90-0.23-3.75%), Citigroup Inc. (C-N26.86-1.16-4.14%) and Wells Fargo & Co. (WFC-N24.94-0.35-1.38%) on concerns that the U.S. government has become reluctant to bail out large troubled lenders. Its outlook on the bank ratings remains negative.

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They took the 900 Million from saving acc.

Fed Now Largest Owner of U.S. Gov’t Debt—Surpassing China

(CNSNews.com) - At the close of business on Tuesday, the debt of the federal government exceeded $15 trillion for the first time--with the largest single owner of the publicly held portion of that debt being the Federal Reserve.

Over the past year, as the Federal Reserve massively increased its holdings of U.S. Treasury securities and entities in China marginally decreased theirs, the Fed surpassed the Chinese as the top owner of publicly held U.S. government debt.

In its latest monthly report, the Federal Reserve said that as of Sept. 28, it owned $1.665 trillion in U.S. Treasury securities. That was more than double the $812 billion in U.S. Treasury securities the Fed said it owned as of Sept. 29, 2010.

Meanwhile, as of the end of this September, entities in mainland China owned $1.1483 trillion in U.S. Treasury securities, according to data published todayby the U.S. Treasury Department. That was down slightly from the $1.1519 trillion in U.S. Treasury securities the Chinese owned as of the end of September 2010, according to the same Treasury Department report.

Thus, at the end of September 2010, the Chinese owned about $339.9 billion more in U.S. Treasury securities than the Fed owned at that time. By the end of September 2011, the Fed owned about $516.7 billion more in U.S. Treasury securities than the Chinese owned.

The U.S. Treasury Department divides the federal government’s debt into two general categories: debt held by the public—the type owned by the Chinese and the Federal Reserve—and “intragovernmental debt,” which consists of what essentially are IOUs the Treasury gives to government trust funds such as the Social Security trust when it takes and spends their money on other things.

The current total national debt of $15.0336 trillion, reported by the Treasury today, consists of approximately $10.3145 trillion in debt held by the public and $4.7191 trillion in intragovernmental debt.

The combined $2.8133 trillion in U.S. government debt held by the public that is now owned by the Federal Reserve and the Chinese equals more than 27 percent of all U.S. government debt held by the public.

Currently, foreign entities, including those in China, own $4.6603 trillion of the U.S. government debt held by the public. These foreign entities, together with the Federal Reserve, own a combined $6.3253 trillion of the U.S. government’s debt held by the public.

That $6.3253 trillion in Federal Reserve-and-foreign-held debt equals more than 61 percent of the U.S. government’s publicly held debt.

Moody's downgrades 10 German public banks

AFP - Moody's downgraded on Wednesday its ratings of 10 German public-sector banks including BayernLB and Deutsche Hypo saying they were now less likely to receive state support if needed.

"The rating actions reflect Moody's assumption that there is now a lower likelihood that these banks would receive external support, if required," it said.

It noted that EU rules restricted support and that Germany had set up a bank resolution scheme.

Nevertheless it said the ratings of the banks, mostly what are known as Landesbanken, still incorporate a high expectation of support as they are ultimately publicly-owned and account for more than one third of lending and deposits.

The actions affected the senior debt and deposit ratings of the banks.

BayernLB and Deutsche Hypo both had their ratings lowered by three notches to "Baa1" from "A1".

Higher Loan Limits for FHA, Amid Higher Risk?

On the same day that independent auditorsreleased a report showing the government mortgage insurer, the FHA, has even less cash reserves now than it did last year to cover potential losses, Congress is readying to vote on a measure that would increase the FHA's market share.

Lawmakers, under heavy pressure from housing lobbies, want to reinstate higher loan limits at the FHA, although not at mortgage giants Fannie Mae and Freddie Mac, which are currently under government conservatorship.

The loan limits fell from a maximum $729,750 to $625,000 on October first. This affected 600 US counties for FHA, but less than half of that for Fannie and Freddie. FHA is not a mortgage originator but an insurer. It is currently the only low down payment game in town, with a minimum 3.5 percent home buyer investment. It is therefore supposed to be a small share of the mortgage market, but given today's tight underwriting, it's about a third of the market.

Now the FHA's share could get even larger because it would have a hold on a small segment of the market from which Fannie and Freddie would be excluded. So how would that affect FHA's bottom line?

"This is a situation that has never occurred before where FHA has the higher limits and Fannie and Freddie would not," said acting FHA commissioner Carol Galante on a conference call this morning. It could increase FHA volume by ten percent, according to mortgage analyst Brian Chappelle at Potomac Partners.

"The higher limits will help improve FHA's finances. Every recent audit has said higher balance loans perform better than lower balance loans," says Chappelle. "If it wasn't for the FHA loans insured in 2009-2011 (including higher balance loans), FHA would already be needing taxpayer assistance."

Mortgages

30 yr fixed 4.04% 4.07% 30 yr fixed jumbo 4.75% 4.83% 15 yr fixed 3.40% 3.52% 15 yr fixed jumbo 4.07% 4.19% 5/1 ARM 2.96% 3.14% 5/1 jumbo ARM 3.14% 3.12%

Find personalized rates: Bankrate.com

But not everyone agrees. The highly influential, Tea Party-conservative Club for Growth slammed the Congressional action: "Including higher FHA loan limits on the heels of this [FHA] audit report is beyond ridiculous...One year ago, Americans sent a message that they wanted to end the subsidies and the bailouts that have crippled our economy. Raising the FHA loan limits again is a step in the exact opposite direction."

Joseph Gyourko, Professor of Real Estate Finance at the Wharton School, says the FHA is in line for a massive government bailout regardless. "Unless the economy makes a swift recovery, my research shows that FHA will need a massive taxpayer bailout--between $50 and $100 billion," he wrote in an article. He cites, among other things, the fact that FHA's low down payment requirement, in the midst of still-falling home prices, makes well over half of its insurance portfolio, based on mortgages taken out by borrowers with negative equity in their homes."

Gyourko argues that the FHA is undercapitalized for its risk and that it overestimates the value of its main insurance fund.

The FHA was originally supposed to help lower income borrowers with lower credit scores, but today it's mandate seems entirely different. Acting Director Galante even touted the fact that credit scores for FHA borrowers this year averaged over 700. FHA is no longer helping low income borrowers, it is supporting a tattered mortgage market that has tightened so dramatically to the point of excluding many credit-worthy borrowers. Now it is going to support even more higher cost markets? How exactly is that decreasing the government's role in the mortgage market?

CNBC

Celente: I got F... by the MF