Credit worries won't vanish despite moves, analysts say

NEW YORK — The Federal Reserve swept into the market this past week to offer a calming hand, but that's still no panacea for the fundamental problems Wall Street faces.

Big institutional investors from hedge funds to investment banks are still wrestling with credit problems spawned by distressed subprime mortgage loans. The housing market still looks gloomy. And the wave of takeovers that drove stocks to new highs this year has dropped off considerably.

The Fed's discount-rate cut and injection of billions of dollars into the banking system alleviate only some of the stress. Wall Street observers say there is still plenty of risk and that the aftershocks from the failure of billions of dollars in subprime loans have yet to be felt.

"What the Fed did was about consistent with putting a Band-Aid on a gunshot wound," said Chris Johnson, founder of Cincinnati-based Johnson Research Group. "You have a situation where the subprime concerns have spread, and there are still a lot of things going on in this market that are just wrong."

Investors are really hankering for a more important interest-rate cut — in the federal funds rate — when policymakers meet next month. That would lower borrowing costs on everything from school loans to mortgages and help stimulate the economy. But there's a catch even with a fed funds cut — it would take months for the benefits to be felt.

Investors must also take into account that it's the dead of August — not exactly a time of the year known for big market comebacks.

Moreover, reverberations from the subprime mortgage crisis are expected to be felt in the months ahead. Some argue the problem has hurt financial markets much more than was warranted, but the fact remains that the nation's financial institutions have been hurting because of it.

"There are still so many unknowns out there," said Greg Gilbert, president of Oakland, Calif.-based Infinity Financial Services. "You're not going to see JPMorgan or Citigroup go bust over this, but they are going to take an earnings hit."

Banks and mortgage lenders that have been hit from their exposure to subprime loans include Washington Mutual and Countrywide Financial. Bigger institutions, such as Goldman Sachs and Bear Stearns, have been pinched by the market volatility that ensued.

On Wednesday, Countrywide said it borrowed $11.5 billion from a group of 40 banks to help stem losses and stay afloat.

The nation's largest mortgage lender had previously raised money by issuing bonds and other debt backed by the mortgages it sells — but a global flight to safety has all but dried those markets up. The company's action set off another wave of heavy selling on Wall Street.

This past week also saw Goldman Sachs tell investors that three hedge funds it manages were socked by market volatility and required a $3 billion infusion of cash.

The Fed's moves were designed to make it easier for these financial institutions to operate. In fact, even if credit and debt worries deepen, global banks will likely come out ahead by snapping up distressed debt at bargain prices.

"I've always said this, the big dogs get to eat first," Gilbert said. "But, for the rest of us, the problems are still out there."