MdmeX, what your people

[Willi]

thinking about the sub-prime debacle?

I saw Cramer's rant on CNBC last week and he seemed panicked!

The link was posted here by me.

[Yuttie]

nothing to be taken too serious, mostly alarmist spewing off. remember majority of the people who subscribe to sub prime mortgage are in the lower income bracket of the US population, which is roughly 10% of the population. Yes money will be lost but it's much ado about nothing really, besides it's not like majority of the houses are defaulting, it's just a increased amount due disingenuous clauses issued by these lenders. dem just a reap dem fruit!

[Willi]

Yuh mad!

You cannot make such a statement in the modern financial world.

All these instruments are repackaged and sold on ...in derivative form to boot. Therefore the possibility of contagion become a huge unknown and any number can play.

Do you know the hedgebook of any of the ma=jor people implicated. Look what a relatively small firm like LTCM neraly caused some years back! Greek risks abount and the fat tails can sting at any time in unpredictable direction.

Kotch and watch, but understand that anything...or nothing can arise.

[Yuttie]

man, yo talking in sicentific notations....what?

[Karl]

Yuh mad!

You cannot make such a statement in the modern financial world.

All these instruments are repackaged and sold on ...in derivative form to boot. Therefore the possibility of contagion become a huge unknown and any number can play.

Do you know the hedgebook of any of the ma=jor people implicated. Look what a relatively small firm like LTCM neraly caused some years back! Greek risks abount and the fat tails can sting at any time in unpredictable direction.

Kotch and watch, but understand that anything...or nothing can arise.

I think Yuttie also overlook the fact that many of the mortgage banks themselves have interconnected relationships...in any case Yuttie, how many billions do you think are at risk?

[Willi]

Mortgage banks???

Man, commercial banks and investment banks in Europe are running for cover!! Banks like Paribas writing of losses and all Europe blaming America for this fallout. There is real panic out there.

A nuh joke thing this.

Is like hurricane coming and people assume it wont hit. Ya neva know.

[Willi]

Derivative risk is essentially unquantifiable in systemic terms.

Too many links and too much interconnectivity.

[Willi]

When yuh barro nuff money to play the markets and people falling over themselves to lend yuh more...everything criss.

When conditions change and man get coward and and pull the plug on lending, players who exist on margin (have a high debt ratio) suddenly cannot make commitments (no new lenders and old lenders demanding margin coverage, ie more money up front to cover the increasingly losing positions)... all hell can break loose. Thru no fault of their own, players with previously solvent positions suddenly cant make margin and have no recourse as they suddenly are treated as lepers by the financiers. The whole thing can feed on itself and that is called contagion.

By the very nature of it, these things are unpredictable and anyone telling you otherwise is lying.

[Islandman]

Yuttie, I have heard a few people saying this without understanding the bigger picture. This has gone way past sub-prime for a while.

To help explain, here is part of a a discussion froma financial forum that I frequent. Bascially the original poster also felt it was overblown and the Fed should allow the bad apples to "reap dem fruit" as you put it.

----------------------------------------------------------------------

Original post:


I think the Fed is a party to privatizing gains and socializing losses.

The "markets" equity, credit, housing, etc need some sanity in them. People need to feel the pain of poor decision...



Response:

You wouldn't feel that if unemployment went to 8% and the economy plunged into recession. The companies in which you invest would get very hurt, many of which couldn't spell 'sub prime' let alone know what one is.

We are in a very dangerous moment in credit markets.

The Commercial Paper Market shut down. The Canadian one was (temporarily?) refloated by a deal swapping the CP for 5 year variable rate floating notes.

The US market is 20 times the size. You couldn't organise that kind of bailout without direct government action.

No CP market, and a number of America's largest companies could go broke. Think GM or Ford: do you think a bank is going to step in and lend them billions of dollars?

Remember the Great Depression of 1929? Milton Friedman showed quite conclusively that what happened was the governors of the Federal Reserve, and the Treasury Secretary, felt speculators needed to be taught a lesson. They allowed the Bank of the United States*, a heavy lender to New York manufacturers, to go broke. Not incidentally, most of Bnk US customers were in the rag and garment trade** (big working capital swings). New York was the largest manufacturing city in the country until the 1970s.

Those companies went broke along with their bank (we had something similar happen early in the 1990s, when the Bank of Credit and Commerce International, banker to the British Asian (Pakistani) community, went bust, devastating many small businesses).

And so spun the banking crisis-- bank after bank went down due to runs on deposits. When FDR assumed office, he had to close the banks for (5?) days.

What is happening to Countrwide now is a similar scary story. Most of what they were doing is legitimate lending business. Yet people are pulling their deposits.

Yes there was risk perverse behaviour. Yes there was bad behaviour all along the line.

But we are past that moment. The guilty are being punished. But so are the innocent.

[Me]

That subprime thing in the states is pretty serious.

GE consumer has already tightened up things because there are no homes for their products.

The CMBS market is inactive for sub and alt a.
The RMBS market is inactive
CMBS Managers are telling their employees to take vacation

JP Morgan is stuck with the Chrysler debt on its books. Some REITS have folded, tightened credit standards are resulting in downgrades for some and inability to fund operations for others.

Eventually there will be an overreaction, but some companies and investors are going to feel it hard.