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Double Strike
George Bush decided to protect honest mortgage borrowers
US President George W. Bush and Federal Reserve Chairman Ben Bernanke decided to reassure investors before the long weekend (Americans celebrate Labor Day on Monday). The initiatives they proposed to combat the mortgage crisis and liquidity shortages received a positive response around the world, causing stock markets to end the week on a positive note.Ben Bernanke said on Friday that the regulator is ready “to take any action that may be necessary to prevent the negative impact of problems in the financial markets on the real sector of the American economy.” The head of the Federal Reserve admitted that as a result of tightening requirements for issuing loans, the decline in the housing market could become more protracted and negatively affect consumer spending and the economy as a whole. In addition, developments in financial markets increase the degree of uncertainty in forecasts regarding the pace of US economic growth and inflation. At the same time, Bernanke indicated that the Federal Reserve’s responsibilities do not include protecting credit institutions and investors from the consequences of their financial decisions. However, developments in financial markets could affect other sectors of the economy and ordinary citizens, and from that perspective, the Fed should not discount these issues.
Against the backdrop of Bernanke's speech, the dollar rose to $1.3640 per euro from $1.3665. Prices for US Treasury bonds partially recovered from the decline, and their yields decreased accordingly.
However, in general, the Fed chairman’s statement did not convey unbridled optimism. But George Bush met the expectations of markets tired of bad news. Speaking in the Rose Garden of the White House, the US President declared the insignificance of the mortgage crisis on the scale of the American economy. In his opinion, problems in the subprime sector represent only a small part of the economy and will not undermine “healthy” economic fundamentals. "The recent unrest in the subprime mortgage industry is modest, relative to the size of the economy," Mr. Bush said. Thus, he emphasized that the government’s role in this matter is limited. “Rescue of creditors at the federal level will only contribute to the re-emergence of the problem,” the US President noted.
In unveiling a package to help borrowers who have fallen behind on their loans, Mr. Bush asked lenders to work with homeowners to renegotiate mortgages to prevent defaults. The president called on Congress to approve legislation he proposed last year to modernize the Federal Housing Administration (FHA), which insures mortgages through a network of private sector lenders. FHA will soon launch a new program, FHA Secure, which will allow homeowners with good credit who still find themselves unable to meet current interest payments to refinance their loans with FHA-insured mortgages, Mr. Bush said.
"This means many struggling families will be able to refinance their loans, pay off monthly payments and keep their homes," Mr. Bush said. He also promised to work with Congress to temporarily reform the tax code to make it easier for homeowners to refinance their mortgages.
“These are positive steps, but the president's proposals are not enough to achieve results,” said Illinois Senator and Democratic presidential candidate Barack Obama. “I believe there needs to be a plan that will save as many affected borrowers as possible.”
Another Democratic presidential candidate, Senate Banking Committee Chairman Christopher Dodd, put it more bluntly: “For too long, this president has sat idly by while families lost their homes.”
However, market participants reacted positively to Bush's speech. Shares of investment companies, which have suffered recently due to the liquidity crisis, rose on Friday, despite low trading volume ahead of the weekend. Shares of the two largest government mortgage companies, Fannie Mae and Freddie Mac, also rose in price. The blue chip Dow Jones index rose by 0.9% on Friday, while the Standard & Poor's 500 index rose by 1.12%.
“It's certainly not a panacea, but it's still good to have some information coming out of the White House,” said David Siders, chief economist for the National Association of Home Builders. “This is positive for markets, both local and around the world, because it shows that the government is paying attention to the problem and is at least starting to do something.”
Domestic investors shared the positive mood with the West. The RTS index rose on Friday by 2.1%, to 1919.89 points, and the MICEX index by 2.19%, to 1677.02 points. “Investors are 100% likely to lower the Fed rate at the next meeting,” notes Elena Guseva, an analyst at Investcapital Management Company. “The markets have already priced this event into account as a fact; now investors are more interested in the Fed’s further steps to resolve the situation in the financial markets.”
The banking sector was among the leaders in growth amid the recovery of all financial markets; Sberbank grew the most (+3.2%), VTB rose by 1%. The oil and gas sector did well: Rosneft grew by 2.9%, Surgutneftegaz by 2.5%, Gazprom added 1.8%, LUKOIL by 1.3%.
“The growth of Russian stock prices on Friday was supported by the positive dynamics of the world's leading stock market indices,” notes Promsvyazbank analyst Oleg Shagov. “Investors took heart on the eve of the speeches of the US President and the head of the Federal Reserve, who, apparently, finally realized their mission and developed plans to save the “Titanic” of the world economy from the impending iceberg of the credit crisis.”
Publishing house McGraw-Hill Cos Inc has decided to replace the president of its financial services division, Standard & Poor's, amid debate over the role of rating agencies in the crisis in the US subprime mortgage market. Kathleen Corbett will be replaced by Diven Sharma, who has been with the company since 2002, McGraw-Hill reports without specifying details. A company representative was not available for comment. Since November 2006, Sharma has served as executive vice president of investments and sales at Standard & Poor's. "The continued growth of the global capital markets creates significant opportunities for Standard & Poor's, and Diven's strategic thinking and deep understanding of global financial markets will help us identify and capitalize on these opportunities," said Harold McGraw III, chairman, president and head of McGraw-Hill. In early August, Chairman of the US Senate Banking Committee Christopher Dodd called for an investigation into the role of rating agencies in the crisis that occurred in the mortgage securities market. EU regulators should also meet with rating agencies to discuss their role in the crisis. REUTERS