The sky is not falling

Not yet.

A $41 billion injection of liquidity from the Federal Reserve failed to keep the Dow Jones Industrial Average from plummeting 362 points on Thursday, but stocks found their footing today thanks to good news about employment growth.

After a stomach-churning morning, a surprising report that the U.S. added 166,000 jobs in October -- the most in five months -- helped the major stock indexes regain lost territory after lunch and finish about even for the day. 

Thursday's losses (which continued Friday in financial stocks) were prompted by renewed fears of massive losses among mortgage lenders and the big investment firms that were playing high roller during the housing boom, betting on mortgage-backed securities and complex, highly-leveraged securities.

Those fears are real, mortgage broker and Inman News columnist Lou Barnes says today, but the potential losses have become too big to recognize. For the moment, the jobs report gave bulls who are "plugged into the global economy, technology and stock-market optimism" somethng to cheer about. 

Not so for the "bond/bank bunch: we weren't there at the time, but things look a lot like the run in to the 1930s," he says.

Both views are correct for now, Barnes says -- but eventually one will prove wrong. Only time will tell if the economy can weather the gathering storm that the bond/bank bunch remains transfixed by.

"I think the last 48 hours make it clear that credit losses are systemic and too large to recognize," Barnes concludes. "It is too late for daylight, proper valuation, and workout. It is firewall time -- on the way to bailout."

Some ominous clouds forming on the horizon include:

--Future write downs. With writedowns related to declining values of securities backed by mortgages exceeding $25 billion, we're getting into territory where further writedowns could be a serious issue, Deutsche Bank analyst Michael Mayo said. Mayo expects Merrill Lynch & Co. Inc.and  Citibank Inc. will each write down $4 billion in losses in the fourth quarter, and that Bear Stearns Cos. Inc., Morgan Stanley, Bank of America Corp. and Wachovia Corp. will take smaller, but still significant, hits (see CNN/Money story).

--Heads rolling. Merrill chief executive Stanley O'Neal is gone, blamed for the firm's risk management practices, or lack thereof. Citigroup's board of directors is holding an emergency meeting this weekend and may jetison CEO Chuck Prince (see Reuters via Yahoo).

--Investigations. The Securities and Exchange Commission is looking into whether Merrill Lynch tried to conceal its losses in mortgage-backed securities from investors, the Wall Street Journal reported today, by transferring risky securities to hedge funds to limit its own exposure (So that $7.9 billion third-quarter write-down Merrill took would have been even worse?).

Also this week New York Attorney General Andrew Cuomo sued First American Corp. and its eAppraiseIT unit, claiming they colluded with Washington Mutual to inflate appraisals (see Inman News story). Now an analyst following WaMu says the bank might have to set aside up to $2.1 billion in addditional reserves if the lawsuit has merit. The suit concerns appraisals on about 262,000 properties, which Keefe Bruyette & Woods analyst Frederick Cannon estimated involve $52.4 billion to $78.6 billion in loans (see MarketWatch story).

--Third quarter results - lenders: At the end of October, Countrywide Financial Corp. reported its first quarterly loss in 25 years: $1.2 billion. Thornburg Mortgage Inc. said it lost $1.09 billion. Bank of America remained profitable despite $527 million in losses on mortgage-backed securities, collateralized debt obligations and structured credit trading. WaMu said third quarter profits fell 72 percent from a year ago, to $210 million, with the home loan group racking up losses of $348 million on a $222 million loss on the sale of mortgages. Citigroup Inc. took $1.56 billion in losses on subprime mortgages warehoused for future securitization, helping take third quarter profits down 57 percent to $2.38 billion.

Builders: Home builders reporting third quarter losses included Pulte Homes ($787.9 million), Centex Corp. ($643.8 million), MDC Holdings ($155.4 million), Standard Pacific ($119.7 million) and The Ryland Group Inc. ($54.7 million). 

Insurers: Mortgage insurers reporting third quarter losses in recent days include Radian Group Inc. ($704 million), MGIC Investment Corp. ($372 million), and PMI Mortgage Insurance ($86.8 million). Insurers of other mortgage-related credit risks in the red included AMBAC Financial Group ($361 million),  Security Capital Assurance ($89.9 million), FGIC Corporation ($65.3 million) and MBIA Inc.($36.6 million).

Anybody hear any good news? Barnes says "lower mortgage rates will put a mattress under 'Bubble Zone' housing, and help housing in the rest of the country to lead a recovery."

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