Whats up with sub prime lending?

[MarkG]

NO IDEA!!!!



btw, those charts that flash with "woosh" sound every 60 secs are silly

[VetLegion]

So those are ... charts?

[PLATO]

Okay...Subprime Mortgages. This is what I do for living and have for the last 20 years. I am, more or less, an expert in these things.

Whatever you wish to know, I can answer with eithier the latest fact or rumour (your choice. ). I am monitoring this situation quite closely and am in the know on quite a few things.

Here is your chance...

[OneFootInTheGrave]

why 191bn liquidity boost in Europe and only 24bn in US... are European banks that much more exposed to all this?

[VetLegion]

OFITG!

Why are you posting here instead of enjoying yourself on some nice beach in Croatia?

[OneFootInTheGrave]

beach in Croatia.... ohohohoho...



haven't seen it in a while, waiting for them to finally drop the compusory army service so hopefully next year... in the meantime "enjoying" work and lovely British weather (rain)

though to drop here to see what's up, and nice to see you still hang around

[PLATO]

Originally posted by OneFootInTheGrave
why 191bn liquidity boost in Europe and only 24bn in US... are European banks that much more exposed to all this?

No. The influx of government money is mainly due to a lack of market confidence. As investors lack confidence and pull back from the market, then more government input is needed to keep liquidity.

The European market is playing catch up in a way. You have been seeing the slow declne in liquidity in the US market for approximately 6 months. The Europeans Have largely ignored this phenomenon as it was supposedly contained within US subprime lending. Little was known of the exposure that European banks (as well as Austrailian and Japanese for that matter) had to these instruments. BNP Paribas halting withdrawals from three of its hedgefunds exposed the European exposure. Quite simply, they were no longer able to value the subprime mortgage assets due to there being absolutely no market for them. This fund was made up of much more than the CMO (collateralized mortgage obligations) that were related to US subprime lending however. This caused a massive loss of investor confidence across the entire European market.

In the US, the market illiquidity is still mainly limited to subprime lending (although we are seeing some bleed over), while in Europe the loss of investor confidence was much more broadbased. Hence, the ECB (European central bank) had to inject much more capital to maintain liquidity.

The Federal Reserve Bank of New York made a further statement on the limited nature of US illiquidity by using the first injection of $19 billion directly to purchase subprime mortgage paper (a somewhat unusual move for a monetary injection to be so specifically targeted).

[OneFootInTheGrave]

interesting that the massive loss of confidence in Europe is tied only to the BNP Paribas "inability to value" three funds... as they are saying the funds will be back and functioning by the end of the month...

let's see who is next

[PLATO]

Originally posted by OneFootInTheGrave
interesting that the massive loss of confidence in Europe is tied only to the BNP Paribas "inability to value" three funds... as they are saying the funds will be back and functioning by the end of the month...

let's see who is next

BNP Paribas was the trigger. All the major European banks followed with warnings after that. That lead to the investor confidence crisis. Fortunately, the influx of government funds is bringing stability back to the markets.

Typically when a fund like the BNP Paribas funds stop withdrawals it is a temporary thing. The two Bear Sterns funds that went down last month were much heavier into subprime CMOs.

Here is where the problem is (well....part of the problem):

Investment banks took subprime paper (that was BBB or BBB-...basically junk bond or near junk bond) and blended it with other (AAA) types of debt to form AAA rated CDOs (Collateralized debt obligations). They sold these to AAA investors at AAA returns. The true nature of the BBB or BBB- paper is now beginning to show through...but in even worse performance than anybody predicted. The set of events to cause this was, although predictable in hindsight, somewhat unique and unforseen.

[Colon™]

Baum is always helpful to turn it into layman's speak:

Wall Street Mill Churns Out Bad Wurst: Caroline Baum (Correct)

By Caroline Baum

(Corrects name of bank in the 17th paragraph.)

Aug. 13 (Bloomberg) -- A homeowner in Irvine, California, defaults on her mortgage; two Bear Stearns hedge funds implode.

French banking giant BNP Paribas halts withdrawals from three of its investment funds; the world's central banks have to inject hundreds of billions of dollars into the money markets over a two-day period to keep interbank lending rates from soaring.

Unrelated events? Hardly. What was once touted as a problem with a niche product (subprime loans) in a small sector of the U.S. economy (residential real estate) is somehow strewing its detritus across the globe.

How did it come to this? How is it that home loans to Main Street became a crisis for Wall Street? The answer owes as much to human nature as to the nature and complexity of structured finance.

Our story begins with an extended period of low worldwide interest rates designed to ease the pain of the burst bubble in Internet and technology stock.

Housing is an interest-rate sensitive industry. In the U.S., residential real estate weathered the 2001 recession with flying colors, courtesy of the Federal Reserve, which cut its benchmark rate to a level not seen in almost half a century.

Potential homeowners responded to the incentive of low rates to buy the house of their dreams. Sometimes they bought two: one to live in, one to rent and/or eventually flip for a profit.

Condo Flop

The ability to meet timely payment of principal and interest wasn't an issue for homebuyers when prices were appreciating at rates of 10 to 15 percent a year, which was standard from 2002 through early 2006. It clearly wasn't an issue for lenders either, who helped would-be buyers secure the financing -- no money down, no questions asked. The more exotic the mortgage, the juicier the commission.

There were plenty of signs along the way that a bubble was developing. The appearance of Web site condoflip.com, for example, with its pitch of facilitating the purchase and sale of preconstruction condos, epitomized the froth that was building in the housing market.

And why not? The Fed, worried about deflation even in 2003, didn't start to raise its overnight rate from a low of 1 percent until May 2004, with the economy taking off.

Enter Wall Street, which is essentially in the sausage- making business. It takes meat and meat by-products and processes them into wurst, which it hawks to investors both sophisticated and naive.

In the case of subprime loans, which were packaged into mortgage bonds and sliced and diced into collateralized mortgage obligations, there was just enough real meat for the securities to be certified as kosher (AAA) by the rating companies.

Beer 'n Brats

In an environment of low interest rates, earning a little extra on AAA-rated securities seemed too good to be true. And it was.

Eventually the knockwurst and bratwurst started to make people sick. Upon testing, the sausage was found to contain too little meat and too much by-product. It wasn't kosher after all.

On further examination, the entire sausage production and distribution chain -- from homebuyers to mortgage lenders, from mortgage brokers to securitizers -- was found to be operating under unsanitary conditions and pretty much shut down until further notice.

And it wasn't just the wurst that was declared unfit for human consumption. Anything suspected of containing meat by- products was shunned by investors in favor of food with a federal government guarantee.

Worst Wurst

By definition, processed meats are opaque (paging Upton Sinclair). Model pricing isn't the same as getting an actual bid. BNP Paribas's admission last week that it couldn't determine what some assets in certain funds were worth was tantamount to HSBC's bombshell six months ago about losses on subprime loans and Countrywide Financial Corp.'s revelation last month of rising delinquencies on top-quality loans.

Investors want to know who and what's next. It seems the risks the derivatives market was supposed to transfer and diffuse are creating new and untested risks of their own.

What the subprime mess and its extended tentacles have produced so far is a liquidity, or short-term funding, crisis, which is something central banks are fully capable of dealing with.

Calls for an emergency rate cut miss the point. The Fed can provide all the reserves that the banking system demands at 5.25 percent. The Fed affirmed its willingness to do so in a statement Friday.

At some point, the crisis may evolve into a full-blown credit crunch, where credit is unavailable at any price to any class of borrower. The National Federation of Independent Business said just the opposite last week after surveying its members. The availability of credit has not changed for small businesses, even though ``the cost of short-term credit has risen,'' according to NFIB chief economist Bill Dunkelberg.

Whatever you call it, the chickens are finally coming home to roost. Let's hope they stay out of the Wall Street meat grinders.

To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net .
Last Updated: August 13, 2007 09:35 EDT

[OneFootInTheGrave]

so we are waiting who is going to be next, if there is noone coming all will be fine and dandy, but noone knows for sure...

[DanS]

From my uneducated viewpoint, it appears that collateralized home loans are not very big problems. Despite it all, most people pay their mortgages on time. Even those who don't pay on time, eventually do pay. Most tranches of collateralized loans eventually will find their price and deals will be done. Every month, people pay or don't pay their mortgages, so it isn't impossible to arrive at a price on a fairly short timeframe.

However, as Baum alludes, there are lots of derivatives that are illiquid. It took Warren Buffett, a skilled investor by any measure, years to get rid of some derivatives at a reasonable price. If we are having some troubles pricing and moving some collateralized mortgages -- which follow a very reliable monthly metronome -- then that indicates to me that there are very many other derivative areas that could prove to be problems if their book price is called into question and the derivatives need to be remarked. If the derivatives are remarked at prices that are not advantageous, then a chain of margin calls could be required and funds could go bust. Unfortunately, I do not have enough knowledge to identify those problem areas.

[notyoueither]

Originally posted by PLATO
Okay...Subprime Mortgages. This is what I do for living and have for the last 20 years. I am, more or less, an expert in these things.

Whatever you wish to know, I can answer with eithier the latest fact or rumour (your choice. ). I am monitoring this situation quite closely and am in the know on quite a few things.

Here is your chance...

Is this the fuse or the kaboom?

If this isn't the kaboom, how long to go?

/me glances at September coming up on the calendar

[DanS]

Originally posted by PLATO
Here is your chance...

Are you going to have a job in a week? Did you recently refinance your house?

[PLATO]

Originally posted by Colon™
Baum is always helpful to turn it into layman's speak:

Actually not a bad analogy. The truth of the matter has several additional layers that Baum doesn't address, but he pretty well lays out what he does.