| November 5, 2007 | by Faiz Shakir, Amanda Terkel, Satyam Khanna, Matt Corley, Jeremy Richmond, and Ali Frick Contact Us | Tell-a-Friend | Archives | Permalink |
Feeling The Credit Crunch
Charles Prince III resigned yesterday as chairman and CEO of Citigroup, the world's largest bank, after the corporation sustained massive losses due to "large exposure to bad loans." Robert Rubin, who served as Treasury Secretary during the Clinton administration, will take over for Prince to "reassure Wall Street" in the wake of Citigroup's announcement that it will write-down, or acknowledge the depreciation of its assets, by between $8 and $11 billion. This amount comes on top of the $5 billion in losses that Citigroup has already suffered in the subprime mortgage crisis. In return for overseeing Citigroup during a year in which its stock value dropped by 31 percent, Prince will receive a severance package worth an estimated $40 million. Merrill Lynch also announced recently that it was incurring a $7.9 billion, subprime-related write-down. These write-downs -- admissions that banks "woefully overestimated the value of assets on [their] books" -- are evidence of the expanding shadow that the sup-prime mortgage crisis is casting over the economy. Initially thought to be a problem for only a few overly-aggressive hedge funds, the subprime crisis has since spread to the world's largest banks, the American housing market, and gradually, the entire American economy.
THE SUBPRIME'S CRUNCH: Recently, Federal Reserve Chairman Ben Bernanke said that the housing slump will continue be a "significant drag" on U.S. growth. While the United States is not yet in a recession, there are some troubling economic indicators. "Spending on new homes and renovations dropped by 20.1 percent in the third quarter -- the largest decrease in a year, and the seventh quarterly decline in a row." Wage growth remained low, while the amount of debt looming over the average American family has continued to rise. President Bush has pointed to recent job growth as an indicator of a sound economy, however, "job growth is still weak by historical standards and perhaps most importantly, remains concentrated in just a few industries." The subprime housing bust has already lead to massive losses for U.S. home owners, with total losses in "real estate wealth expected to range from $2 trillion to $4 trillion."
ADMINISTRATION'S RESPONSE: Members of the Bush administration have displayed a lack of understanding about the breadth and seriousness of the subprime crisis. There are more than 2.8 million families with mortgages that reset in 2007 or 2008. The average family could see their mortgage payments rise an additional $10,000. When trouble was first noticed in March, Bernake dismissed the potential ramifications of the looming problems: "The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained." In July, Treasury Secretary Henry Paulson echoed Bernake, saying, "I don't think it [the subprime mess] poses any threat to the overall economy." As recently as September, the Federal Reserve was reporting that "outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited." Yet the massive loses sustained by Citigroup and Merrill Lynch are proof that the affects of the subprime crisis have extended beyond the small group of lenders initially thought to be affected. Paulson recently stepped up the administration's rhetoric, declaring that we must ensure "yesterday's excesses" aren't repeated. Yet during his tenure as CEO of Goldman Sachs, Paulson profited by gorging on subprime bonds. "He should admit to having been involved in creating the problem that we have now," said Rep. Brad Miller (D-NC).
IMPACT ON MINORITIES: While the administration was ignoring the emerging subprime crisis and continuing to claim the economy was strong, large numbers of low-income families and minorities were suffering its affects. "[S]ubprime loans have been particularly prevalent in predominantly black and Hispanic neighborhoods" in recent years. "Nearly half of blacks who bought a house in 2005 or 2006 ended up with a high-interest mortgage, compared with 13 percent of white home buyers, according to an Atlanta Journal-Constitution analysis of federal mortgage data." Correspondingly, "[s]ixty-nine percent of black Americans feel the United States is in a recession, while only 42 percent of white Americans feel the same way." Among black home buyers "making more than $100,000 a year, 41 percent got a subprime mortgage, compared with 7 percent of whites in the same income category." While the subprime crisis has been expanding for more than six months, only in the last few weeks -- as the problem has increasingly afflicted corporate America -- has the administration started to take appropriate steps to remedy the situation.
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