World Economy Close To Meltdown: Penner

Source : The Business Times, September 20, 2007

He says Fed rate cut won't fix sub-prime mortgage problem

(NEW YORK) The world economy 'is probably at its scariest point since the Depression' as fallout from the US sub-prime mortgage crisis crimps access to credit, said Ethan Penner, a pioneer of the US$600 billion commercial mortgage-backed securities market in the early 1990s.

'We're probably at the closest point to a big meltdown, a depression-type meltdown than we have been in our lives,' said Mr Penner, 46, now a principal at real estate fund management firm Lubert-Adler Partners LP, in a speech at a conference.

The US housing market is an 'unmitigated disaster' and will take at least another 18 months to recover, as the US Federal Reserve and European Central Bank respond to turmoil in credit markets, Mr Penner said. As foreclosures rise, lenders will try to sell the properties they acquire at depressed prices, dragging the market down further, he said.

'The effect that's going to have on the economy is sure to be bad. I don't think we're going to have a depression-like situation, but we are going to print a lot of money, and that's going to have its consequences. The price we will pay as a society to avoid depression is high inflation.'

Commercial real estate prices also are bound to drop as mortgage lenders refuse to underwrite prospective rent increases, he said. 'Nobody's going to be buying based on rosy forecasts of rental growth. That game's over.'

The Federal Reserve has lowered its benchmark interest rate a half point to 4.75 per cent, its first cut in four years. The bigger-than-forecast reduction signalled that the Fed fears the US economy is at risk of sinking into a recession.

A rate cut will not fix the problem, said Mr Penner, who was head of mortgage finance at Nomura Securities International Inc when it first packaged commercial mortgages as securities for sale to investors.

'It's completely beyond the Fed's capacity' to change long-term rates, he said. 'The Fed can't really call bond buyers and tell them to buy bonds.'

The three main rating companies, Moody's Investors Service, Standard & Poor's and Fitch Ratings, deserve blame for the turmoil sweeping credit markets, Mr Penner said. 'Trust has been lost' in the ratings companies, he said. 'There are three rating agencies and they govern finance in the world. It's kind of shocking.'

S&P and Moody's failed to downgrade bonds backed by loans to borrowers with poor credit until July, when some had already lost more than 50 cents on the dollar. Politicians in the US and Europe have called for probes into the ratings companies.

Mr Penner built Nomura into the largest real estate lender in the US before running into trouble in 1998 when the Russian government default spurred investors to flee loan securitisations for safer investments. -- Bloomberg