Sub Prime.The Idiots Guide

[z109]

Let's go back to the beginning - how come mortgages were allowed to be given to people who patently could not make repayments?

Who says they couldn't make repayments? Just because they had no income, no job and no assets? Ah well, since house prices always go up, they can pay the interest with a top-up mortgage and then sell at a profit in six months time.

Does a regulator not monitor this? Isn't that what regulators are for? Or are banks a law onto themselves?

Where do regulators recruit from?

Thought of another question: who is going to be punished for this mess?

Well, the bin charge people went to jail. So did the Rossport 5 (indefinite incarceration, as I recall). So my guess is no-one. The phrase "one law for the rich..." didn't invent itself.

 

[ClubMan]

Well, the bin charge people went to jail. So did the Rossport 5 (indefinite incarceration, as I recall).

Weren't either or both for contempt of court requiring that they purge the contempt before being released?

 

[z109]

However as I said in my original mail it is astonishing that a problem with a small percentage of the American mortgage market can have such worldwide implications.

9% of American mortgages are in some state of default (at least 2 months behind on payments). Commercial banks are permitted to leverage up 10:1, that means for each dollar in deposits, they can lend up to ten dollars. As they are allowed to do it, so most banks are leveraged that high. With a 9% default rate, this wipes out 90% of the capital that banks have.

Moodys have just upped their expected default rates for sub-prime and prime jumbo mortgages:
2006 sub-prime: 22%
2006 prime jumbo: ~1.8%
At 22% default, you have gone bust owing 120% of your capital.
Even at 1.8% for prime jumbo (note, these are the best quality house-buyers), you lose 18% of your capital.

It is not, nor has it ever been, solely about sub-prime. As the most ridiculous version of loans offerred, they were the ones most likely to blow up first. The rest of them will follow in sequence right up to the highest grade of loans. The losses for the higher grades will be lower, but through the wonders of leverage will be magnified. This is also why it is not a liquidity problem, it is a solvency problem.

Sounds like the pebble in the mill pond ripple effect or that pesky butterfly starting the hurricane by flapping his wings in the Amazon.

It is not a chaotic system, it is a tightly-coupled one. Someone has thrown one of their crudely made wooden shoes into the highly engineered threshing engine.

 

[z109]

Weren't either or both for contempt of court requiring that they purge the contempt before being released?

Yup, but it's most unfair of you to attempt to impose details on a bitter rant about the inequities of the legal system.

 

[room305]

This is also why it is not a liquidity problem, it is a solvency problem.

This statement cannot be repeated frequently enough. It is not just mistrust that has banks unwilling to lend, it's a lack of capital.

That's okay though, I believe future generations of American taxpayers have plenty and are willing and able to stump up.

 

[Bronte]

Why didn't the US goverment just pay the mortgages of those who were unable to repay rather than bailing out the banks? Would this have cost more?