Fallout From Credit Crunch Creates Another One

Washington Post (11/20/07) P. D1; Irwin, Neil; Tse, Tomoeh MurakamiA recent report by Goldman Sachs predicts $400 billion in losses tied to mortgage foreclosures--which ultimately could shrink the amount of money available to borrowers of home, commercial real estate and other consumer loans as banks dip into their capital to cover these losses. While the credit crunch has eased a bit from August, investors are increasingly worried about potential losses and are viewing mortgage- and commercial-real-estate backed securities and other types of debt as riskier than originally thought, demanding higher interest rates in response. Analysts and investors believe the Federal Reserve will slash interest rates only if negative economic reports are released, and concerns are being generated by the future markets pointing to a 20-percent chance of a 0.5 percentage point or larger decrease in interest rates when policymakers gather next month. According to former Fed Gov. Laurence Meyer, "The general point is that the current circumstances are marked by sizable losses on credit positions, with no one quite sure of what the eventual magnitude of those losses will be or where they are located. That raises the possibility of financial markets becoming more turbulent."