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Financial pros warn of panic over credit By PÉRALTE C. PAUL
The Atlanta Journal-Constitution Published on: 03/01/08

Taken in context, the subprime mortgage mess is just a small slice of a multitrillion-dollar debt pie.

Those mortgages, which the Federal Reserve Bank of Atlanta pegs with a total value nationally of $1 trillion, represented just 3 percent of the $30 trillion of domestic debt that is not held in the financial sector. Read entire article

problems repaying them. Those problems have cascaded into a global crisis.

The subprime mess has already taken several domestic financial services firms under and threatens others around the world.

Friday, several high-ranking metro area bankers cautioned against some of the proposals put forth by some of the presidential candidates and others, saying the plans could cripple the banking system.

Market forces already are making the option of subprime loans a thing of the past, said Richard Dorfman, president and chief executive of the Federal Home Loan Bank of Atlanta.

The Atlanta bank, one of 12 such institutions in the country, figures large in the mortgage discussion — albeit indirectly — because it serves as a bank of nearly last resort to other institutions that have to put their home loan portfolios up as collateral.

"We hear coming out of political capitols, both federal and state on a daily basis, these intense feelings that we've got to do something about subprime," Dorfman said at a business luncheon sponsored by the Commerce Club downtown.

"Subprime is already done. It's dead. It's finished. The market has eliminated it. An asset for which there is no bid does not exist."

The focus instead ought to be on how much the credit panic will spread, he said, from credit cards to municipal bond insurers to corporate borrowings.

"It would not be difficult to create, at least what seems to me, a plausible overall scenario that you could go from one negative event to another and another and get yourself to a position of global depression pretty quickly," he said.

Looking back, it's easy to see how the subprime mess mushroomed into a global financial crisis, said Dennis P. Lockhart, president and chief executive of the Atlanta Fed.

After several good years of low consumer credit losses, mortgage originators became a little lax with underwriting guidelines, even as the borrowing pool was increasingly becoming a little shakier creditwise.

Borrowers were still paying on time, home values were rising and low interest rates fueled one of the biggest home-buying booms in recent history.

"Under the assumption of ever-increasing housing prices, mortgages written on these low standards were valued as though they were low-risk," Lockhart said. "Once housing prices stopped rising and began declining in some markets, the potential for increases in subprime default rates and the increased riskiness of the mortgages became obvious to financial markets."

But by then it was already too late. Financial services firms were packaging those subprime loans in different types of securities, such as structured investment vehicles, that were then resold to investors.