This was the week when the sub-prime mess became a contagion and the 'virus' as the Financial Times described it, went global.
'Contagion' is a scary word in this context, for although the impact of the sub-prime mess has not been as dramatic as that from the collapse of Long Term Credit Management and the Russian default in 1998, the fear is that it will be.
It's moving more slowly and there's a surprisingly long list of victims in different countries, something we didn't see too much of nine years ago.
And if you think 'contagion' is laying it on a bit thick and the Financial Times is indulging in a bit of journalese, read this brief comment from a week ago from a Citigroup Fixed Interest Strategist in New York.
"This is the story of contagion", rues US Fixed Income Strategist Mikhail Foux, "for contagion is spreading, liquidity is drying up, and everybody has started to feel the pain."
"…however, while the problems in the leveraged loan markets are well publicized, we do not think that the increase in loan spreads is justified by fundamentals… it is definitely an overshoot… and yet with the panic among investors spreading, it seems that it is just a matter of time until the contagion starts spreading to other asset classes…
"Emerging Markets could be the next target for global contagion… equity could be another potential target, with stocks priced for perfection… so amid this merciless rout, we advise caution… stay defensive as we move into the illiquid month of August."
And after August is September, traditionally the worst month for shares in the US and then October with the ghosts of 1929 and 1987.
Basis and Absolute Capital in Australia were caught upin previous weeks, along with the Caliber Hedge Fund in the UK and another British Fund called Cheyne Walk.
And even when the two Bear Stearns hedge funds hit the wall, it seemed limited to Wall Street and other money centres in the US: a couple of funds in Florida and California.
But then it spread. A $US3 billion hedge fund called Sorwood bailed out and was taken over by the Citadel group after halving in size. A warning about the problems in sub-prime housing spilling over into better rated home loans and home owners, then worries about Wall Street investment banks: their bonds marked down to junk in the credit insurance markets.
A big US home mortgage group, a better quality operator called American Home Mortgage, revealed it was stopping payments last Friday night and by Tuesday of this week was all but gone, the shares almost worthless and $US20 billion in mortgages which could be dumped on the market to drive values even lower in a fire sale.
And Thursday night in the US, American Home said it would go out of business Friday night, Australian time.
The in a dramatic two days, a medium-sized German industrial bank, IKB, sacks its CEO, withdraws a profit forecast and gets support from its 38% owner, a government financial group.
And reports last night claimed that it was saved by an $A5 billion emergency rescue organised by a German Government scared of a banking disaster like that of 1931 in the Weimar republic days.
But there was more: two US private mortgage insurers, one the biggest and called MGIC and a second called Radian (which MGIC had agreed to buy in February) revealed they had lost over $US1 billion in a company that services and sold sub-prime mortgages.
This came only hours after the sub-prime turmoil touched Australia again, snaring Macquarie Bank this time through its associate, Macquarie Fortress where two funds could lose $A300 million.
Macquarie Bank shares plunged to $73.70, a fall of 10% Wednesday, and then eased a further 10c yesterday as the overall market moved up by 1%. Macquarie is still under suspicion as far as investors are concerned.
And then a third Bear Stearns Hedge Fund was revealed as blocking investor withdrawals. It has around $US900 million in assets (and shrinking) and is trying to ride out the storm because it says it has high quality assets.
Yesterday, a Taiwanese insurance company revealed a sub-prime exposure and writes it off: around $US18 million. Not much, but the newssent the shares down, hitting confidence in the Taiwan and other Asian stockmarkets.
As well, there were concerns that the surprise 150 point jump in the Dow late in trading on Wednesday resulted from an error. But that could also be typical of the rising level of fear and risk aversion now permeating all markets.
Dead cat bounces in markets are going to be the nature of the day.
We saw one on Monday, and while yesterday's was a bit stronger, it still failed to convince. Not even half of Wednesday's losses of 198 points and 203 points on the All Ords and ASX 200 respectively, were recovered here; the All Ords and the ASX 200 up by around 60-70 points, and looking weak in the afternoon.
Now the question is what happens if the virus is spreading into the wider economy in America?
There have been hints in the slump in sales of new and existing houses, the fall in new housing starts, a slow easing in prices in many of the big property markets; job losses as companies close or cutback, and worries about some big builders. Beazer, one of the largest US homebuilders, was forced to deny market rumours that it was heading for collapse this week.
But the slump in housing cut all growth in US construction in June and overall activity fell while consumer spending slowed to a nine month low in June. Nevertheless, the latest consumer sentiment survey (taken before this week's falls), was at a six year high.
That's what these fears of the 'contagion' into the wider economy are all about.
In the last couple of weeks the sub-prime problem has spread into better rated, so-call
