Credit fears swirled again through financial markets on Friday as lender Thornburg Mortgage Inc said its survival was in doubt and ratings agency Fitch downgraded Washington Mutual Inc. Fitch cut its ratings on Washington Mutual, the largest US savings and loan association, by two notches to "BBB," the second lowest investment grade, from "A-minus."
Fitch also said it may cut its ratings on Bank of America Corp, Citigroup, Fifth Third and SunTrust, due to their exposures to residential mortgages. Investors delivered another vote of no-confidence in a broad range of financial assets, particularly the market for US investment-grade corporate bonds, which sank to its weakest level on record on Friday.
This striking move to reprice risk pummelled the mortgage bond market again. Bonds issued by Fannie Mae and Freddie Mac extended recent declines, hitting levels not seen in more than 20 years, though they found a firmer footing by the close.
US stocks also suffered, closing at their lowest level in 19 months as Wall Street sentiment slumped after a monthly US government report showing employers unexpectedly shed jobs for the second month in a row and at the fastest rate in nearly five years.
In the credit markets, the chilling news came from Thornburg, which provides loans to help people buy expensive homes. It said it could not meet its own lenders' demands for $610 million of cash or collateral. The troubles were the latest signs of the hangover in the financial markets from this decade's debt-fuelled housing boom, which has crashed with a resounding thud.
"What you're getting is a massive unwinding of an over-leveraged asset, residential housing," said Stephen Kane, managing director of Metropolitan West Asset Management, Los Angeles. "As unwinding occurs, it puts pricing pressure on the market, which creates more pressure on leveraged investors , and margin calls."
Thornburg said falling mortgage prices, together with liquidity imperilled by a surge of margin calls from its own lenders, "have raised substantial doubt about the company's ability to continue as a going concern."
Margin calls force borrowers to pay back loans or post extra collateral. The Thornburg news appeared to dim the glow of the Federal Reserve's latest efforts to halt credit markets' spiral of fear with an offer of more liquidity.
The Fed said it would raise amounts offered in upcoming Term Auction Facility auctions, announced in December to help counter the credit crunch that resulted from last year's mortgage debacle.
The Fed said it would increase amounts in its Term Auction Facility auctions March 10 and March 24 to $50 billion each, a rise of $20 billion from the amounts previously announced for each auction. Meanwhile, bond insurer Ambac Financial Group Inc fought to stave off credit rating downgrades by selling stock at fire-sale prices to raise capital.
Ambac, a bond insurer at the center of fears that credit turmoil will contaminate the usually safe municipal bond market, said it raised capital totalling $1.5 billion, the bulk of it by selling stock at a 9 percent discount.
Before Ambac's sale of stock and convertibles, credit rating agencies had said they would likely affirm its top ratings if it successfully issued securities. Many investors feared that Ambac's potential losses would trigger ratings downgrades for the bond insurer, which in turn could lower the ratings on the bonds it insures.
Those downgrades could have forced investors to sell billions of dollars of Ambac-guaranteed bonds, lifting borrowing costs for cities and consumers alike. Earlier Friday, the Labour Department said 63,000 non-farm jobs were eliminated last month on top of an upwardly revised loss of 22,000 jobs in January. The bad news on jobs was sharply contrary to Wall Street economists' forecasts that 25,000 jobs would be added in February.
In addition, the department cut in half the jobs added in December - to 41,000 from 82,000 it estimated a month ago - in a move that underlined the steady deterioration in the nation's labour markets.
"This employment report removes all doubt that the economy has slipped into a recession," said Jane Caron, chief economic strategist at Dwight Asset Management in Burlington, Vermont. "It's important that the Fed took steps to ease liquidity pressures since money markets are clearly suffering another bout of turmoil."
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