Subprime fallout draws comparisons to past crises

Reuters.com, Fri Aug 10, 2007
By Walden Siew

NEW YORK (Reuters) - The turmoil sweeping the U.S. subprime mortgage market is starting to resemble some of the biggest financial crises of the past 100 years as its fallout infects credit conditions worldwide.

While most analysts say it's too soon to hit the panic button, parallels to past crises are starting to fall in place: a domestic credit crunch, contagion to international markets and more volatility, followed by bank intervention.

The Federal Reserve and European Central Bank pumped money into the banking system for a second day on Friday to ward off a global credit crisis and the Fed said it stood ready to do more if needed. Central banks worldwide have injected at least $323.3 billion in the past 48 hours.

The subprime situation has inspired comparisons to the collapse of Long-Term Capital Management and the Russian sovereign loan default, both in 1998, as well as to the U.S. savings and loans crisis of the 1980's. Some have even found similarities to the early stages of the Great Depression of the1930s.

"This process is a very old and familiar process," says Jack Malvey, chief global fixed income strategist at Lehman Brothers. "These are regular currents in capital markets -- there's a break in the chain from the weakest link and there's a ripple effect."

In this case, the "weakest link" are subprime borrowers, those with checkered credit histories who were granted loans during the U.S. housing boom. They were the first group to miss home loan payments or default.

The risk is now widening to so-called Alt-A mortgages, a pool of alternative loans made to A-rated borrowers that could not meet typical prime borrowing terms.

As with past crises, the problem is also moving beyond domestic borders to affect global markets.