Europe's biggest bank unloaded $24 billion (U.S.) of opaque mortgage securities in a fire

Faltering credit markets have tipped over into a new and more dangerous phase – and everyone from municipalities trying to get sewers fixed to people shopping for a car loan will pay the price.Yesterday, Alabama's most populous county teetered on the verge what could become the United States' largest municipal bankruptcy. A pair of financial companies said they received default notices from banks nervously looking for loan payments. Reports swirled that Europe's biggest bank unloaded $24 billion (U.S.) of opaque mortgage securities in a fire sale.Those on the front lines – from bond traders to investment managers – say the latest batch of bad news indicates a harrowing new time in the credit crisis. And that could send a shock wave through the U.S. economy as consumers feel their own version of the pain.
"We are in historic scarier-than-all-hell territory," said T.J. Marta, an analyst who monitors the fixed-income markets for RBC Capital Markets. "I am hearing many people say that the market is more broken now than it ever has been.''
Problems are popping up on multiple fronts and all have different implications.
Alabama's Jefferson County is considering a bankruptcy filing to resolve a financial crisis surrounding $3.2 billion of sewer debt. The county is in talks with banks to work out a solution to its liquidity crisis.
Meanwhile, the insurance cities were able to purchase to protect their bonds is losing its lustre. Ratings agencies worry a rise in defaults on bonds backed by riskier debt would cost bond insurers so much they would no longer be worthy of their highest ratings. Those pristine ratings are essential to keep bond insurers in business."The problem now with insurance products is their value is only as good as the perceived view on the insurer," said Richard Tortora, president of Capital Markets Advisors, which provides bond advisory services. Those negative perceptions could last for years, he said.It demonstrates that credit markets are facing a new round of tightening, hitting parts of the market deemed relatively safe months ago.
Many of the largest investment banks are due to report results in two weeks, amid fears of a new round of massive writedowns.
Paul Lueken, president of 1st Advantage Mortgage in Lombard, Ill, said mortgage loan costs are rising as conditions worsen.In the past few weeks, the "spread" of a home loan's interest rate over the interest rate on a Treasury bond – a key measure of the cost of a mortgage – has spiked to a 25-year high.