Today was another roller-coaster day as news of a potential collapse of hedge fund Carlyle Capital and the dollar's drop to a 12-year low against the yen sent the stock market down more than 160 points this morning, but the market recovered when a Standard & Poor's report that the end of the subprime write-off process was within sight was enough to push the Dow to a 35-point gain.
Standard & Poor's reported that subprime mortgage write-downs could top out at $285 billion, an indication that the end is near since financial institutions have already written off roughly $150 billion in failed subprime loans.
Markets reacted positively because the presumption was that the closer financial institutions are to writing off the bad subprime loans, the sooner the housing market and the economy will return to stability.
"My sense of it is if you made relatively optimistic assumptions on how the economy would respond to the fiscal stimulus package and Fed's aggressive rate cuts, S&P's numbers are not too far off," said Brian Bethune, U.S. economist for research group Global Insight.
"It would be nice if we could come to closure on the write-off process if all these various pieces fall into place, but I don't know if we want to get into a sense of complacency that we're close to the end game," he concluded.
The stock market took no solace in Treasury Secretary's Henry Paulson's statements at the National Press Club in Washington this morning, when the general consensus was that the Treasury Secretary offered no new information.
The market finally rebounded by midday primarily on news of the S&P report and word that House Financial Services Committee Chairman Barney Frank had introduced legislation that would allow the Federal Housing Administration (FHA) to provide up to $300 billion in new guarantees to help refinance at-risk borrowers into viable mortgages.
According to a press release issued by Frank's office, in exchange for the acceptance of a substantial write-down of principal, the existing lender or mortgage holder would receive a short payment from the proceeds of a new FHA loan if the restructured loan would result in terms that the home buyer can reasonably be expected to pay. The existing lender or mortgage holder will have a cash payment and no further credit exposure to the borrower. This could potentially refinance between 1 and 2 million loans and help these families stay in their homes.