Co-Ed Naked Call Writing

[DanS]

Originally posted by DrSpike
IIRC they are fifth behind Halifax, Nationwide, C&G and Alliance and Leicester, so 19% does look a little high. But it could be my memory.

I don't have a great deal of equity as I only bought 2 years ago, but I'm not concerned as I said before because it doesn't look like affecting the other big lenders - in essence it's Northern Rock's business model which has driven this. In terms of identifying a long run impact of the recent events on the UK housing market (which is where you started from) I doubt there will be any.

I would like to understand this a little bit better. If Northern Rock can't get anybody but the lender of last resort to accept good quality loans as collateral at a reasonable rate, who would accept the loans of the other lenders? What in particular do you have in mind with regard to Northern Rock's business model? They all need to find additional money somewhere if they are to continue to write mortgages.

You know, it's crazy that we're even having this discussion. Home loans are some of the safest assets out there. Yet here we have a run on a bank that by all accounts has a good quality loan book.

[Bkeela]

I'd be curious to know how long it would take Warren Buffett to earn one million dollars with a starting capital of $10,000.

[DrSpike]

Originally posted by DanS


I would like to understand this a little bit better. If Northern Rock can't get anybody but the lender of last resort to accept good quality loans as collateral at a reasonable rate, who would accept the loans of the other lenders? What in particular do you have in mind with regard to Northern Rock's business model? They all need to find additional money somewhere if they are to continue to write mortgages.

Thanks - good questions. It's probably best to take one step back: terms like credit crunch get thrown around in such debates without a real understanding of what is meant, and this is what is driving the incorrect (or at best disingenuous) remarks made by others above. In essence what it means in this context is less liquidity in financial markets (well, duh), but for two reasons.

The first is the pattern of interest rates over the last year or so, and the second is a change in the perception of risk amongst key financial players, due to the US subprime mortgage market problems. Both affect overall lending (to individuals and businesses) and the interbank lending market.

However, there is a crucial distinction in that the first is a policy intent - if there weren't less credit then monetary policy would not be effective at all! This affects all lenders, but by design. The key channel through which monetary policy works is through a deliberate increase in the rate of interest charged for interbank lending. By itself this would not cause Northern Rock any issues.

The second part is where Northern Rock will be affected more than other lenders - the increased perception of risk has reinforced (actually in many respects the impact is larger so it's more than reinforced) the above because from what has emerged recently their business model relies a lot more on interbank lending (and slightly wider credit markets similarly affected by the US subprime issues) to meet their commitments.

And to polish off, my best guess at this stage is that other lenders will find the part of the 'credit crunch' that predominantly affects them (the first part) manageable, as indeed they should.

[Colonâ„¢]

[DanS]

I've understood "credit crunch" to refer specifically to the situation where debt does not find a price and therefore the market seizes up. Risk is being repriced only in the sense that -- for a time -- it no longer has a price. In this respect, the increase in rates is probably a necessary condition to a credit crunch, but isn't the proximate cause.

Northern Rock is an interesting case, because from what little I know, relying on a slightly wider credit market should be a strength rather than a weakness. Basically, Northern Rock should have more lending windows that it can visit. How can this be bad? And why should the other mortgage writers find solace in visiting fewer lending windows? The only thing that makes sense to me right now is that maybe those other lenders are not so disproportionately involved in the mortgage writing market and can therefore trade on those assets that still have a price. Will they continue to write mortgages at a pace that supports the UK real estate market? It seems unlikely to me.

[DrSpike]

That sounds right to me - NR has a narrower set of options because of it's relatively higher reliance on interbank lending.

[DanS]

As you offered, I fear that we will have to wait for the autopsy on this one. At this point, I don't know the percentage that NR placed inn the interbank market and how that compares to others. I note that the other lenders and builders are getting hit pretty hard in the market today.

I can understand that the other UK banks don't want to buy the cow, when they are getting the milk for free, but it's incredible to me that somewhere in this wide world, there's not a party willing to take on NR at a steep discount, as did Bank of America with Countrywide.

[Colonâ„¢]

Originally posted by DrSpike
That sounds right to me - NR has a narrower set of options because of it's relatively higher reliance on interbank lending.

Though interest rate hikes by the BoE, the Fed et all typically don't result in a drying up of the money market as evidenced in the widened spreads with the 3-months LIBOR rate. The market overnight rate jumped to 6.47%, regardless of the BoE's official rate.
If a bank that primarily relies on deposits for funding gets into a trouble because of a high street bank run, are you then also going to maintain it's just the business model at fault? That it has a no bearings on banks that aren't so reliant on deposits?

[DrSpike]

Originally posted by DanS
As you offered, I fear that we will have to wait for the autopsy on this one. At this point, I don't know the percentage that NR placed inn the interbank market and how that compares to others. I note that the other lenders and builders are getting hit pretty hard in the market today.

I can understand that the other UK banks don't want to buy the cow, when they are getting the milk for free, but it's incredible to me that somewhere in this wide world, there's not a party willing to take on NR at a steep discount, as did Bank of America with Countrywide.

It's all speculation at this stage but NR being bought out by a big bank that itself hasn't been hit too hard by the US subprime market problems (probably ruling out Barclays) remains a strong possibility over the next couple of weeks imo. I'm sure BoE are angling for this behind the scenes (unofficially of course) as it would settle everyone down and make a lot of sense.

[DanS]

In the thread that Slaughtermeyer linked (pardon me for treating a Slaughtermeyer post seriously), there was lots of discussion about China being sold $300 billion of mostly worthless debt. Does anybody here have the details on that?

[Colonâ„¢]

Maybe it's related to this? http://business.guardian.co.uk/story/0,,2155456,00.html

Numbers are a bit off but you never know with such sources.

Originally posted by DrSpike
It's all speculation at this stage but NR being bought out by a big bank that itself hasn't been hit too hard by the US subprime market problems (probably ruling out Barclays) remains a strong possibility over the next couple of weeks imo. I'm sure BoE are angling for this behind the scenes (unofficially of course) as it would settle everyone down and make a lot of sense.

Do you ever say something we don't already know?

[DanS]

The news today is that Alliance and Leicester fell 31%. How does Alliance and Leicester fit into the mortgage market?

Edit: Also, Bradford & Bingley lost 15% today. These names mean nothing to me, so you'll have to go by your own experience. These are pretty small banks, it appears.

[DanS]

Originally posted by Bkeela
I'd be curious to know how long it would take Warren Buffett to earn one million dollars with a starting capital of $10,000.

24 years.

[One_more_turn]

Originally posted by DanS
In the thread that Slaughtermeyer linked (pardon me for treating a Slaughtermeyer post seriously), there was lots of discussion about China being sold $300 billion of mostly worthless debt. Does anybody here have the details on that?

China bought $300 billion worth of CDOs. Most of that money is in the AAA tranches. (For a detailed description of CDOs, see http://en.wikipedia.org/wiki/Collate...ebt_obligation) These CDOs have invested in subprime mortgages, although it's unclear how much. Current default rate on subprime mortgages is about 18%. It will take about 20% default rate on a CDO's total assets before the AAA tranche starts losing money, so the Chinese may be ok.

[DanS]

Pretty surreal scenes, I must say.