http://news.bbc.co.uk/2/hi/business/7073131.stm
has some informative graphics explaining how sub-prime lending came to be so profitable for banks and investment banks, with some fun facts, such as Deutsche Bank is now the largest property owner in Cleveland.
Phil,
That BBC article has some factual errors.
The piece makes it sound as if banks were only recently able to simply “unload” their mortgage loans off to bond holders. No so.
Most U.S. banks have “sold” the bulk of the home loans that they originated for years now.
This is oversimplification, but the bad stuff began to occur when the finace stars on Wall Street began to vastly underestimate the odds of a subprime borrower defaulting and the odds of our housing markert finally cooling off. (They forgot that all good things come to an end)
That and the insanity that prevailed in the home purchaser’s market over the last three or four years led to a mid-decade home bubble that popped (a little). We had a genuine “tulip” crisis in the making but so many folks were making such enormous sums, their own greed did a great job of blinding them to the obvious.
The various financial instruments became too complex and the models used to predict trends were just plain wrong. Gravity and sanity normally work in conjection, IMO.
Am I right in thinking that this “fallout” is far from over and may possibly spill over into late next year and beyond? The way I read it some of these big banks probably don’t even know if they own bonds that are backed by some of these “less than valuable” mortgages. Wouldn’t they have to do the due diligence completely (or wait for the forclosure notices/non payment issues to hit? ) I could be wrong, but in my eyes there should be a lot of folks out there doing some serious belt tightening in the coming year. (Some of these people even work in my company) Here is some practical advice folks, finish unwrapping your current stuff before you venture a thought of buying more.
/leaves soapbox.
Marshall,
The/our bailout of these folks who are struggling to make their loan payments ultimately (a-ha) also bails out (to some extent) the lenders/investment houses who foolishly agreed to buy the paper.
Typical scenario:
Sandy wants a 500K home but he can only afford a 300K. No problem, says her loan broker. Just sign up for our 18 month teaser rate and re-fi in 18 months. Sandy goes for it.
18 months later, Sandy cannot re-fi because the home she bought for 500 a year ago is now only selling for 400, so the lender says NO.
Sandy gets hit with a hefty rate increase and she cries Help!.
Does she deserve any help? Now that’s the real question.
Paul Krugman gave a talk on this the other day that I thought filled
out the details really well.
Jen,
Thank you for the link. Although I find it interesting to hear economic
theory given in layman’s terms, Krugman took nearly an hour to explain
that (surpise, surprise) all this stuff would be better served by (guess what?) more government regs.
More protection from ourselves, I guess.
In my lowly opine it would be better served if American high school students were required to read the simply delightful book “The Wealthy Barber”.
Ps
The seventy minute talk is worth watching just for the Q and A at the end.
The very first questioner effectively laid all the blame for the subprime drama on the Bush Administration’s “finacial direction”.
I wonder how tightly the grip is that the Bush Administration has on the average liberal, Jewish banker on Wall Street?
The most annoying thing about the subprime situtation is that it is now up to the taxpayer to bail out the banks from the mess.
You may have heard that in the UK, the government has approved a cash injection of $20 billion into the banking system to encourage inter bank lending and reducing inter bank rates. This is in addition to $110 billion already given to the bank Northern Rock to save it from collapsing.
Now that money comes out of the taxpayers pockets; the banks go lending to anyone to profit and when they see trouble, the government and us haves to step in. Gee….