Friday, August 31, 2007

Twin Assault

Twin Assault

U.S. President George W. Bush will outline reforms on Friday to help struggling subprime mortgage borrowers, and his central bank chief will deliver a speech which will be pored over for hints of a looming rate cut.

Federal Reserve Chairman Ben Bernanke speaks on "Housing and Monetary Policy" at around 10:00 a.m EDT.

Bush, who will make a statement at the White House an hour later, will announce assistance for homeowners with subprime mortgages to avoid default via changes to the tax code.

"He will also discuss reform efforts to prevent these kinds of problems from arising in the future," a senior U.S. administration official said.

Massive problems with U.S. home loans, stemming from aggressive lending mainly to poor people who have been squeezed as interest rates climbed, have fostered a liquidity crisis around the globe as banks have scrambled to calculate their exposure to the sector.

The risk of a credit squeeze arising from mass mortgage defaults has also raised the prospect of U.S. consumers trimming spending at a rate that could tip the world's largest economy into recession.

Investors have been pinning their hopes on an interest rate cut by the Fed, at its next meeting on September 18, to shore up the U.S. economy and stop the sickness spreading.

Bernanke reiterated on Wednesday the Fed was "prepared to act as needed" to ensure credit market problems do not adversely affect the economy, fuelling speculation the central bank will lower its benchmark federal funds rate from 5.25 percent.

But experts have said the Fed is in no rush to act as it wants to disabuse investors of the idea that it is there to bail out their poor decisions.

European shares rose as investor hopes mounted for dual action from the Fed and the U.S. government. U.S. stock futures pointed to a leap when Wall Street opens.

"It's comforting to investors that Bush and the administration are recognizing that there's a problem, but I still think the subprime mortgage problem is just going to get worse," said Benjamin Halliburton, managing director at Tradition Capital Management in Summit, New Jersey.

"I do think the market is going to have another panic down if Bernanke doesn't signal he'll cut rates in September."

Bush will press for legislation giving state agency the Federal Housing Administration flexibility to help subprime borrowers, including the power to guarantee loans for people at least 90 days behind in mortgage payments to help them avoid foreclosure, the Wall Street Journal reported.


Japanese Finance Minister Fukushiro Nukaga said he had been told by U.S. Treasury Secretary Henry Paulson global economic fundamentals were strong, but that it may take some time for adjustments in markets to take place.

International Monetary Fund First Deputy Managing Director John Lipsky said market turmoil would dent but not derail world growth, but that it was too soon to declare the troubles over.

"Central bank action so far has been appropriate but market turbulence has not fully receded," Lipsky told Reuters on the sidelines of a gathering of central bankers and economists in Jackson Hole, Wyoming.

It is there that Bernanke will speak later.

There were plenty of signs the crisis was far from over.

Rates for three-month sterling hit their highest in 8-1/2 years and rates for other currencies also surged, reflecting persistently strong demand for cash from financial institutions.

Australia's central bank struggled to ease upward pressure on some market interest rates as renewed trouble in the global commercial paper market made institutions reluctant to lend.

Deutsche Bank (DBKGn.DE: Quote, Profile, Research) has shut down its London proprietary credit trading desk and is laying off some of the team, a source familiar with the matter said.

Earlier this month a source close to the bank said Deutsche was set to ditch its credit relative-value trading strategy -- used by the London desk -- after losses of about $135 million.

Deutsche Bank declined to comment. It has said nothing so far about any losses stemming from credit market tremors.

Britain's Barclays Plc (BARC.L: Quote, Profile, Research), meanwhile, turned to the Bank of England as the lender of last resort for the second time this month after at technical breakdown in the British clearing system, a source close to the matter said.

Barclays declined to confirm it had used the borrowing facility but said in a statement it was "flush with liquidity".

Mike Peacock

LONDON (Reuters)

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