GLOBAL investment group Merrill Lynch claims the mortgage crisis has worsened and is spreading to other credit markets as the US tips towards recession.
Merrill Lynch chief executive John Thain said at the weekend that car loans, community credit and the commercial credit market were now affected.
He said more and more loans were not being serviced in the US and that the market was witnessing "a very pronounced slow-down in economic activity".
Mr Thain's comments came just hours after the US Federal Reserve unveiled late on Friday a series of moves designed to improve the flow of credit.
It was also revealed yesterday that the FBI was investigating claims of alleged securities fraud against the largest US mortgage lender, Countrywide Financial.
The Sunday edition of The New York Times reported that the FBI was investigating whether Countrywide misrepresented its financial condition and the soundness of its loans in securities filings.
Investigators had been looking at possible accounting fraud or insider trading connected to loans made to borrowers with sub-prime credit, the Times said.
The latest recession fears were further stoked by a report that showed the US economy lost 63,000 jobs in February in a second month of declining employment.
The weaker-than-expected data will boost the odds of another cut in US interest rates, which have been slashed already from 5.25 per cent in September to 3.0 per cent.
In an interview with a Paris newspaper, Mr Thain said the cause of the credit crunch was a "liquidity bubble" caused by excessive credit awards during a long period of low interest rates.
"Everyone bears some responsibility: the mortgage lenders, the institutions that sold this credit on to others, the valuation agencies that evaluated the loans and the investors who bought them," Mr Thain said.
Merrill Lynch has written off $US11.5 billion ($A12.44 billion) as a result of the sub-prime mortgage crisis after an $US8.6 billion ($A9.3 billion) loss last year.
The bank raised $US12.8 billion ($A13.84 billion) from Singapore, Kuwait and South Korea, among others.
Similar concern was expressed by a range of New York traders.
"We are in an unprecedented real estate and credit crisis that is whipping its way through the US economy like a midwestern tornado," said Morgan Keegan analyst, Kevin Giddis.
Fred Dickson, at DA Davidson & Co said the rate cuts had failed to spur economic activity.
"The Fed should stop cutting rates," he said.
Lehman Brothers economist Ethan Harris said he believed the US central bank would eventually regain the upperhand.
"We believe that loss of confidence will be short lived - as the economy and commodity markets weaken both actual and expected inflation will likely fall," Mr Harris said, adding however, that his firm was 'still penciling in a recession."
