FOAK Sub Prime

Can someone explain to me the (so called) sub prime melt down.
http://news.bbc.co.uk/1/hi/business/7323809.stm

So far the banks totted up must have "written down" about a Trillion
dollars. This seems like bollocks to me. I don't believe there is that much
actual defaulted bad debt *all of a sudden* in the American home market. So
WTF is going on?
My suspicious mind expects it to be some kind of carve up and hiding other
assorted incompetence.

 

it's only around 50bn. Which is fiddling small change in the global
picture.

the amount of debt hasn't appeared "all of a sudden", what's happened
"all of a sudden" is that for a large number of reasons, banks have
stopped trusting each other and so there's a liquidity gap, and so
everything turns to shit. For instance, Bear Stearns would have been
operating fine today, if a few Hedge Funds had trusted them a bit more
and waited as little as 2-3 weeks before calling in their loans.

oh there's a lot of that going on too - a certain swiss bank I could
mention.

 

Using the patented Mavis Beacon "Hunt&Peck" Technique, Hog

I was just thinking that myself. What's the average price of a house in
the USA right now? A quick Google gives about $300K. So, let's assume
100% mortgages, and make another assumption, that they'll only get 75%
of the money back from the sale of the asset. And UBS just wrote off
$4bn. So that's... <counts on fingers> 53,000 bad mortgages. One bank.
Hmmm...

 

Except it isn't just one bank. The way that they have been selling
mortgage liability between themselves means that the percieved risk is
no longer in a single chuck but spread around among all the banks. C4
News had a really good article on this when the crunch was starting[1].

Phil.

[1] Rather than selling single mortgage liabilities to each other they
now package them up and then divide the package into slices which they
then sell. Those slices contain sections from many-multiple mortgages
and the buyer had no real way of knowing whether their slice contained
one or more sub-prime mortgages. Hence the loss of trust (or one reason
anyway!).

 

So what they are all doing is jumping on a bandwagon and writing down future
percieved losses which will probably never happen as most people do not
default. The short term liquidity gap is another matter altogether.

So lets see, what is that going to do to future accounts and bonuses? I
think I understand.

It's all about that AnthonyE I tell you.

 

Except it isn't just one bank. The way that they have been selling
mortgage liability between themselves means that the percieved risk is
no longer in a single chuck but spread around among all the banks. C4
News had a really good article on this when the crunch was starting[1].

Phil.

[1] Rather than selling single mortgage liabilities to each other they
now package them up and then divide the package into slices which they
then sell. Those slices contain sections from many-multiple mortgages
and the buyer had no real way of knowing whether their slice contained
one or more sub-prime mortgages. Hence the loss of trust (or one reason
anyway!).[/QUOTE]

I'd recommend anyone who's in the slightest bit interested in this to
read 'Liar's Poker', by Micheal Lewis, in which he describes how Salomon
Bros packaged up good and bad mortgages and other loan business to sell
them as bongs.
--
Dave
GS850x2 XS650 SE6a

"A scone and tea at half past three
Makes the day a little brighter
Keep your cakes and fancy tarts
And stick them up your shiter."

 

It also means that really noone can reposess the house since the
mortgage is spread over too many holders(*). Hence the banks know that
what they have has *zero* value and not 75% or so of the original price...

(*) Several cases already won in court IIRC

 

I don't know about bonuses, but a bloody great time to pick to be
selling a house. Between that and the pound tanking against the
Euro...

 

I'm buying you **** ;o)

Offer you 75% of your asking price for a quick cash sale! It's only worth
60% but I'm your bestest friend.

 

Top put it simply, the lenders share the risk with other institutions
by 'selling' parts of their book to other banks. The trouble is that there
is no way of knowing how the risk has been shared across the market and the
full exposure to the risk is an uncertain quantity. This is leadfing to
panic and markets don't like panic.

There is an analogy to be drawn to the Lloyd's Fiasco of 89 to 91 when many
underwriters found that they were reinsuring each other on long-tail riks.
They only found out their true positions when the reinsurance claims came
in and the shit hit the proverbial.

 

Ha! Our funds have returned between 1 and 2.5% above the benchmark
this quarter, so we're actually having a really good year so far.

*thumbs nose*

 

Can you give me investment advice then? or get commission by referring me
to someone who can?

 

the percentage of sub-prime mortgages that will be defaulted is very
high. In a similar way to endownment mortgages in the UK in the 1980s,
individual mortgage vendors were selling high-stepped mortgages to
people they knew couldn't afford them, so they could get their
commission. This was never a practice that was going to work out long-
term.

You'd be interested to know that at UBS, despite everything, people
were getting massive bonuses this year.

actually, his lot are fairly ethical players.

And, BTW, I'm still waiting for you to retract the foul slur about me
working in the insurance industry...

 

nah, but he can probably knock you up a pretty PDF.

 

Heh. W're outsourcing all that to Les Frogs anyway.
I'm now up to my elbows in C# stuff that I don't really understand.

 

Using the patented Mavis Beacon "Hunt&Peck" Technique, Mark Olson

Thinking of defaulting?

 

<retracts>

Better?

 

I guess so.

 

hmm.

In a reply to me he said:

"Doesn't Financial Services have it's own lore in terms of security
and legal
frameworks. Champ would know. (yes I know you are working in the
Insurance
subset)"

OK, you're probably right, he was directing his comment about
insurance to you ( though he should have said "yes, I know /he is/
working in the insurance subset).

 

No it was Darsy I was addressing, incorrectly.