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Banking

Have Wall Street banks gone subprime at the wrong time?

Wall Street is praying that the US economy will land softly now that the Federal Reserve has pricked the housing market bubble, because it will be bad news for mortgage origination if house prices stall for long or, even worse, fall. Already there are early signs of credit deterioration in some of the riskier mortgage securitizations. It can only be a matter of time before subordinated CDO tranches start to take a hit. Alex Chambers reports from New York.

INVESTMENT BANKS HAVE rushed to buy subprime platforms this year. Merrill Lynch bought a mortgage unit called First Franklin for $1.3 billion, and Morgan Stanley purchased Saxon Capital for $700 million. European banks have jumped on the subprime bandwagon; this summer Deutsche Bank paid $429 million for Mortgage IT and Barclays Capital paid Wachovia $469 million for HomEq Servicing.

It appears to be a logical, if somewhat belated, reaction to the runaway success Lehman Brothers and Bear Stearns have enjoyed in their fixed-income franchises from having integrated mortgage origination businesses.

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