Echoes of Greenspan's infamous 'irrational exuberance' warning, this time not regarding tech stocks but LBOs and Private Equity? I find the timing of this statement spectacularly fascinating... Think about it...why would he even comment on this subject matter now? These things always end the same way. Just follow the script. Many of these companies that have been leveraged to the hilt through the takeover process are doomed. http://www.bloomberg.com/apps/news?pid=20601069&sid=aaDHFNF5QJEw&refer=fedwatch Bernanke Says Subprime Curbs to Hurt Housing Market (Update6) May 17 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke issued a double-barreled warning on the U.S. economy, saying the housing market will continue to struggle and the Fed sees ``significant risks'' in the leveraged-buyout boom. Bernanke, speaking at a conference in Chicago today, said curbs on subprime lending ``are expected to be a source of some restraint on home purchases and residential investment in coming quarters.'' And he said the Fed is ``beginning to look at'' what he called ``the risks that are associated with working with private-equity firms.'' The Fed chief's comments suggest the central bank has raised its guard against a second credit bubble emerging in the form of leveraged buyouts at a time when the U.S. economy is dealing with the mortgage bust. Lawmakers and consumer advocates have blamed the Fed and other regulators for lax enforcement while lenders wrote a record $2.8 trillion in mortgages from 2004 to 2006. ``You learn from experience,'' said John Lonski, chief economist at Moody's Investors Service Inc. in New York. ``The theme here would be whenever you have higher-risk borrowing accelerate considerably, the risks of unexpected debt-repayment problems rise.'' The Fed chairman maintained his forecast that the slump in housing won't have a broader impact on the economy, comments that were echoed by former Fed chief Alan Greenspan today. ``We do not expect significant spillovers from the subprime market to the rest of the economy or financial system,'' Bernanke said. Risk to Growth Fed officials this year have cited the housing recession as a main risk to economic growth, which was the weakest in four years last quarter. Bernanke's comments today reflect the consensus of policy makers that the downturn in housing is unlikely to cause consumers to cut spending. Bernanke said banks are appropriately reducing credit to the market for securities backed by subprime mortgages. ``We are likely to see further increases in delinquencies and foreclosures this year and next as many adjustable-rate loans face interest-rate resets,'' Bernanke told the Chicago Fed Bank's annual conference on bank structure and competition. Still, ``the vast majority of mortgages, including even subprime mortgages, continue to perform well.'' Bernanke's comments follow remarks this week from New York Fed President Timothy Geithner, the central bank's chief liaison to Wall Street, that officials are ``looking carefully'' at the loans that finance leveraged buyouts. Banks are helping fund a record pace of takeovers this year, with the value of announced LBOs soaring 40 percent to $188 billion in the first quarter. Bonds at Risk Leveraged buyout firms are private investment companies that use debt to cover about two-thirds of the price of their takeovers. The bonds and loans would be at risk if the acquired company runs into financial trouble and can't meet its obligations. In some of the past year's biggest deals, including the LBO of TXU Corp., banks made short-term investments alongside the buyers in a new type of financing called ``equity bridges.'' The claims of equity investors are behind those of lenders in case of companies filing bankruptcy. Because of their size, private equity firms ``can push terms that are favorable for the borrower,'' said Martin Fridson, head of Fridsonvision LLC, a New York-based research firm. ``There has been a lot of spread contraction, and the covenant terms have been under attack'' on buyout loans, he said. Fridson, a former managing director of high-yield research at Merrill Lynch & Co., consults with the Fed on finance and leverage. Faulting the Fed Lawmakers fault the Fed for not publicly rebuking any bank for failing to follow up on guidance on mortgage lending practices. Subprime loans accounted for an increasing share of the market as the value of mortgages written rose 40 percent in the three years through 2006. Bernanke noted that subprime mortgages made up more than half of the foreclosures in the fourth quarter of 2006. He said the central bank is reviewing its authority to prohibit lending specific practices. ``It is past time for action,'' Democratic Senator Christopher Dodd of Connecticut, who chairs the Senate Banking Committee, said in a statement today. He said Bernanke ``misspoke'' because the central bank is required to write rules that protect home borrowers from ``unfair or deceptive practices.'' `Self-Correction' The Fed chairman today stressed that the subprime mortgage market is already showing ``signs of self-correction'' and that markets work better than regulators when it comes to allocating capital. The Fed's Open Market Committee has kept its benchmark lending rate at 5.25 percent for seven consecutive meetings and this month reiterated that inflation is its ``predominant'' concern. The Fed's preferred price gauge has stayed at the top or above the comfort range of at least a half-dozen policy makers for three years. ``Although a leveling-off of sales late last year suggested some stabilization of housing demand, the latest readings indicate a further step-down in the first quarter,'' Bernanke said. Subprime mortgages are extended at rates at least 2 or 3 percentage points above prime loans. Borrowers typically have poor or limited credit histories or high debt relative to income. About 14 percent of all first-lien mortgages were subprime loans last year, Bernanke said. Delinquency rates on subprime mortgages rose to 13.3 percent in the final quarter of 2006, a 3 1/2-year high. Foreclosure rates rose to 4.53 percent, the highest since the first quarter of 2004. Greenspan Remarks ``The prime market is doing reasonably well,'' Greenspan, who retired in January 2006, said today at a meeting hosted by the Atlanta Journal-Constitution in Atlanta. ``Some people are holding off on purchasing homes. Even so, we are getting a gradual rise in the prime market.'' Bernanke said demand for high-yielding bonds in capital markets played a role in the fall in loan standards as subprime mortgage lending expanded. ``The practice of selling mortgages to investors may have contributed to the weakening of underwriting standards,'' Bernanke said. At the urging of Congress, the Fed and other regulators issued a proposed guidance on prudent lending standards on subprime loans. Such guidance letters typically increase the focus on these products during routine bank examinations. Officials published the proposed guidance March 8. Dodd and nine other senators asked Bernanke to use the Fed's legal authority to issue tighter regulations against predatory lending, such as prohibiting loans that would eat up more than 50 percent of a borrower's income. June Hearing The Fed said this month it will hold a hearing June 14 to examine how it might use its authority to prevent abuses in the mortgage market. Democratic Senator Charles Schumer of New York said in a statement today that ``it's good news that Chairman Bernanke and the Fed may finally be cracking down on abusive lending in the housing market later this summer.'' ``Regulators must walk a fine line'' in using their authority to prevent abuses while avoiding actions that would close the market for borrowers, Bernanke said. He suggested that he favors using increased disclosure and supervisory guidance instead of new rule-making. ``Effective disclosures should be the first line of defense against improper lending,'' he said. ``Guidance can be modified as needed to apply to different situations.''