Paulson warns of damage to come

Ben White and Eoin Callan
Financial Times
Wednesday October 17, 2007

Hank Paulson, the US Treasury Secretary, warned on Tuesday that the downturn in the nation’s mortgage market would burden the economy “for some time” as several big banks, the largest homebuilder and a major construction equipment maker all highlighted the growing impact of the housing decline.

Mr Paulson’s grim remarks came as James Owens, CEO of Caterpillar, the equipment maker, called the current housing decline the worst since the second world war. DR Horton, the largest US homebuilder, said nearly half its orders were cancelled in the last quarter.

Taken together with discouraging bank earnings, the housing news helped push stocks lower and bond prices higher as investors worried about the possibility of a US economic slowdown.

The yield on the policy-sensitive two-year Treasury note fell 9 basis points to 4.125 per cent – the biggest drop since the Federal Reserve cut interest rates by 50 basis points on September 18. As leading bank stocks tumbled, the Dow Jones Industrial average fell 0.5 per cent to 13,912.94.

Wells Fargo, the second-biggest US mortgage lender, reported rising losses on home equity and credit card loans and saw its shares fall 4 per cent. The bank said it would cut back on the amount it allows consumers to borrow against the value of their homes, threatening a key pillar of US consumer spending and economic growth. Wells Fargo said net credit losses increased 35 per cent from last year to $892m.

Full article here.