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Bernanke, Paulson Were Wrong: Subprime Contagion Is Spreading

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Aug. 10 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke was wrong.

So were U.S. Treasury Secretary Henry Paulson and Merrill Lynch & Co. Chief Executive Officer Stanley O'Neal.

The subprime mortgage industry's problems were contained, they all said. It turns out that the turmoil was contagious...The $2 trillion market for mortgages not backed by government-sponsored agencies is at a standstill. That's just the beginning...

``The subprime mess is now spreading to banks,'' says Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts. ``A lot of international banks, especially those in Europe, did invest a lot in the collateralized debt markets, especially the subprime situation here in the U.S., so they're suffering.''

Peter Lynch, chairman of private equity fund Prime Active Capital Plc in Dublin, said the ECB was ``treating this like an emergency.''

Bernanke told Congress on March 28 that subprime defaults were ``likely to be contained.'' The Fed chief, who declined to comment for this story, changed his assessment last month.

Paulson said June 20 that subprime fallout ``will not affect the economy overall.''

This week on CNBC, he provided a less definitive assessment, saying that markets have been ``unsettled largely because of disruption in the subprime space.''

``We've had a major correction in that housing sector,'' Paulson said. ``It will take a while for the impact of that to ripple through the economy as mortgages reset.''

Among the other executives joining the chorus was Bank of America Corp. CEO Kenneth Lewis, who said June 20 that the housing slump was just about over.

``We're seeing the worst of it,'' Lewis said.

`Broader Fallout' Within the week, he was contradicted by a team of Bank of America analysts, who called losses in the mortgage market the ``tip of the iceberg'' and predicted ``broader fallout'' from adjustable-rate loans resetting at higher interest rates.

Just love it! Do go to Bloomberg and read the whole - lots of men in suits eating hats!!

TD

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