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Economics business.The Sub-prime Crisis. How bad is it?


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World markets hit by credit woes

A commuter in Japan on 2 November

Some Asian markets had been at record levels

World markets have fallen back on renewed fears about the full impact of the sub-prime crisis on the US economy, echoing heavy falls on Wall Street.

. . .

While stocks in the US had risen on Wednesday after the Federal Reserve opted to cut rates to 4.5% from 4.75%, by Thursday fears about the credit crisis and the wider economy dominated markets.

BBC NEWS | Business | World markets hit by credit woes

 

Opposition keeps close eye on its promises

Matthew Franklin, Chief political correspondent | October 26, 2007

 

KEVIN Rudd says he is closely watching his election promises amid fears that higher inflation will trigger an increase in home loan interest rates.

 

The Opposition Leader's caution yesterday came as both John Howard and Peter Costello stressed there was no case for Australian banks to raise standard interest rates in the wake of the US sub-prime crisis.

 

Mr Rudd renewed his pledge not to match dollar for dollar the Howard Government's election promises in the wake of Wednesday's release of figures showing inflation at 0.9 per cent in the September quarter.

Opposition keeps close eye on its promises | The Australian
The Daily Reckoning Australia

 

Subprime Crisis: US Economy Needs a Correction

Posted by Bill Bonner on Aug 27th, 2007

 

We were at a dinner party last night. Among the guests were three bankers – two French bankers…and an investment banker with Lehman Bros. (NYSE:LEH) in London.

 

“This credit crunch is hitting harder than most people realise,” said the man from Lehman Bros. “It’s not just a subprime problem any more. You can put together a great deal…you still won’t be able to get financing for it.

 

“But so far, only people in the financial industry are affected. And, let’s be honest, none of us are really hurting. We made so much money in the last few years…we could all retire if we wanted to. And I don’t think the crunch will last too much longer or go much deeper. There’s just too much going on.”

 

Bob Diamond, president of Barclay’s Bank, is quoted in the Financial Times:

“We have a ‘real cracking of the liquidity bubble,’ he said.”

 

The question is whether the crack can be mended with a little central bank epoxy. Most people think so…all hope so. And all are working on it.

Goldman (NYSE:GS) put US$2 billion of its own money into its troubled hedge fund. The Bank of America (NYSE:BAC) bought US$2 billion worth of Countrywide Financial (NYSE:CFC), America’s biggest mortgage lender. And central bankers all over the world are providing as much liquidity as the market is willing to take.

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This crisis is going to explode in the next two years as the interest rates are adjusted up. Two groups are at fault, first is the greedy lenders who made loans to people they knew could not afford them when rates were adjusted and who also told consumers they could refinance later to a fixed rate. The second, is the naive, stupid, and/or uneducated consumers who signed on the dotted line for property they could not afford at higher rates. The one group who is not at fault is the taxpayers who wisely stayed out of this mess.

 

The only way out is for lenders to negotiate with consumers and take a loss by giving them affordable rates and allowing them to keep their homes. If they do not then the losses will be too large to absorb. Some lenders have seen the light and started down this path. The US taxpayer is in no mood to bail out lenders and consumers, who have gotten themselves into this mess, as they remember the S & L crisis and its taxpayer bailout.

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I just did a little search on sub prime loans to see what my least favourite bank was up to -Citibank.

While I was doing that a dozen adds came up touting for sub-prime loan business.

Does this seem strange to you?

 

Citibank has a new CEO.

I wonder how much money the last one lost and how much his golden parachute will be?(Lost- $5.9 billion in the third quarter, and potentially $8 billion to $11 billion to come-NYT)

C i t i g r o u p : B a n k r u p t i n g D e m o c r a c y

 

Predatory Associates

Citigroup, Predatory Lending and the

Credit Crunch for the Poor and Working Class

. . .

. . .

Jodie Bernstein, director of FTC’s Bureau of Consumer Protection, said Associates engaged in a variety of deceptive practices.

 

“They hid essential information from consumers, misrepresented loan terms, flipped loans and packed optional fees to raise the costs of the loans,” Bernstein charged.

“What had made the alleged practices more egregious is that they primarily victimized consumers who were the most vulnerable –– hard-working homeowners who had to borrow to meet emergency needs and often had no other access to capital.”

Citigroup: Bankrupting Democracy

Late last week, a report by Michael L. Mayo, an analyst at Deutsche Bank, suggested that Merrill could be forced to write down another $2 billion in mortgage securities on top of the $8 billion write-down it has already taken.

At the end of June, Citigroup still had $13 billion in C.D.O.’s on its books, down from $24 billion in January, according to Meredith Whitney, an analyst at CIBC World Markets.

http://www.nytimes.com/2007/11/05/business/05place.html

Write-Downs by Big Banks Spark Rally

By ERIC DASH

 

Wall Street’s banking giants started to admit their problems, and investors took the disclosures as a sign that the worst may be over.

October 2, 2007BusinessNews

Is the Dance Over? Citigroup Is Upbeat

Is the Dance Over? Citigroup Is Upbeat

By ERIC DASH

 

Citigroup’s C.E.O., Charles O. Prince III, having confronted one crisis after another in his four years leading the bank, thinks the recent Wall Street credit problems are just another bump in the road.

August 3, 2007BusinessNews

Citigroup Inc. News - The New York Times

Blacks dominate subprime loans

 

By CARRIE TEEGARDIN

The Atlanta Journal-Constitution

Published on: 11/04/07

 

Black Atlantans of all income groups were much more likely than whites to take out high-interest "subprime" mortgages when buying a home, making them more vulnerable in the ongoing mortgage meltdown.

 

Nearly half of blacks who bought a house in 2005 or 2006 ended up with a high-interest mortgage, compared with 13 percent of white home buyers, according to an Atlanta Journal-Constitution analysis of federal mortgage data.

Blacks dominate subprime loans | ajc.com

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"The US dollar has been slammed today," he said.

 

Mr Rennie said he expected the Australian dollar to reach 96 US cents by the end of 2007 and tipped further rate rises in December and February. .

$A closes higher on back of rates rise - Breaking News - Business - Breaking News

 

How big is the sub-prime market?

 

Investment bank Merrill Lynch has estimated that the sub-prime mortgage market in the UK alone was worth between £25bn and £30bn in 2005.

 

According to market analyst group Datamonitor, mainstream mortgage lending grew by 4.1% in the year previous to that, while sub-prime mortgage lending rose 9.1% for the period.

 

Until recently, the future of the sub-prime sector had looked rosy.

 

But the troubles besetting New Century Financial in the US, and higher interest rates in the US, UK and across Europe, have raised concerns in some corners about the long-term viability of the industry.

BBC NEWS | Business | Q&A: Sub-prime lending

 

Many Australian banks have been exposed.

But everone is keeping the extent very close to the chest.

 

A financial crisis that began in the US is coming to a home near you

As American banks admit the billion-dollar scale of their losses, Bank of England Governor warns that the worst is still to come in Britain

By Sean O'Grady, Economics Editor

Published: 07 November 2007

 

No one knows where the bodies are buried. Indeed, no one is quite sure exactly how many bodies there are. But they are out there, and there are plenty of them: underperforming loans, worthless securities and overvalued assets, all safely buried well away from the banks' balance sheets. Buried – but not quite dead

A financial crisis that began in the US is coming to a home near you - Independent Online Edition > Business News
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Well, we're trying to find *some* humor in it:

 

Hi Buffy,

 

In the terms of 'economic rocket science' they have created a very exotic particle in the homes of poor Americans, that has become orphaned, and can never find its exotic partner to cancel each other out, because it has been given to the wealthy houses on Wall street by the powers that be.

 

Another example of 'economic' parallel universes that occupy the same physical location.

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I just wish I had enough money saved up to buy a whole big bunch of the properties which are being foreclosed. To get a few score houses at 30-40% of their actual value, hold on to them, and potentially rent them out would really go a long way to making my future and my offspring's future economically and monetarily safer.

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Bad Subprime Bet Costs Morgan Stanley $3.7 Billion

Dow Jones

November 07, 2007: 08:31 PM EST

 

(Updates to add further detail of the trading bet at the root of the losses.)

 

NEW YORK -(Dow Jones)- Morgan Stanley (MS) said Wednesday it will take a $3.7 billion write-down to reflect a drop in the value of mortgage-related positions taken by its traders.

 

The hit, which resulted from a speculative trading bet with the bank's own money, could reduce fourth-quarter net income by about $2.5 billion, Morgan Stanley said. The bank said the loss could grow if markets worsen before its fiscal year wraps up at the end of November, and put its remaining exposure at $ 6 billion.

 

The write-down is in line with estimates made by analysts this week and well below the $7.9 billion in similar write-offs taken by Merrill Lynch & Co. (MER) two weeks ago and the $8 billion to $11 billion in additional write-downs announced Sunday by Citigroup Inc. ©. Morgan Stanley's remaining exposure contrasts with nearly $21 billion at Merrill and $55 billion at Citigroup.

. . .

"Not only are delinquency and foreclosure rates high, but recovery rates are coming in lower than what might have been hoped, and are likely to go even lower in the year ahead," the analysts wrote.

3rd UPDATE: Bad Subprime Bet Costs Morgan Stanley $3.7 Billion

 

Its tough love when you owe in India

Asia Times Online :: South Asia news - It hurts when an Indian bank loan goes bad

Woo hoo - Party on America! Like I said on Monday, the MSM is yadda yaddaing the bad news as the media zombies tell you to BUYBUYBUY because, without your money, they may have to finally face up to whatever’s hiding in their closet. CFC’s Angelo Mozilo, who originated 7% of the scariest of all financial instruments, the sub-prime loans, says there may be monsters in his closet, quite an admission from a guy who lost $1.2Bn last quarter and dropped his stock 60% (but not before executives sold $842M worth of their own shares). MER opened their closet and found $8.4Bn worth of things so horrible that they closed the door (admitting there might be more scary things inside but no one wants to look) and they fired the guy who got them there.

2007 October | Phil’s Stock World

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I just wish I had enough money saved up to buy a whole big bunch of the properties which are being foreclosed. To get a few score houses at 30-40% of their actual value, hold on to them, and potentially rent them out would really go a long way to making my future and my offspring's future economically and monetarily safer.

 

You couldn't pay me to be a landlord, even if the homes were free.

Especially in an economic downturn, possibly recession.

 

As for the housing bubble, there is nothing malign involved. It is just the latest bubble. Some people (both borrowers and lenders) getting greedy and making stupid decisions.

On its own, this would have a minor effect on the US economy. Combined with high oil prices and a low dollar, we could be in for quite the ride:eek2:

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.

On its own, this would have a minor effect on the US economy. Combined with high oil prices and a low dollar, we could be in for quite the ride:eek2:

The thing is it is not just a USA problem. Many loans were sold on to other banks so banks here and in many other countriesare exposed and also stand to make losses.

It is said when the US economy sneezes the rest of the world catches cold.

I don't think the exposure is too bad here but institutions seem to be keeping quiet about it so it is hard to know for sure.

 

Our inflation figures are up and both sides in the next election are promising tax cuts so that won't help. As inflation goes up so o does housing interest rates. It is now beginning to bite in our mortgage belt as people are selling up. We just pray the Chinese keep wanting us to dig up Australia and post it to them.

 

The prediction is US$ AUD$ parity by Christmas so expect a lot of Aussie tourist to spend money & complain about your beer soon.:confused: :)

Always willing to help the Yanks out when they get in over their heads.:)

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As for the housing bubble, there is nothing malign involved. It is just the latest bubble.

 

Hi Zythryn,

 

The rate 'bubbles' have been developing in the new millennia is a real cause of concern. While this bubble may be benign the increasing rate of bubbles is most definitely not (an indication of too much money and not enough good investments?).

 

By reducing interest rates the Reserve risks creating another credit bubble in response to the housing bubble.

 

It would be much easier for everybody if the politicians actually regulated blatant speculation and prevented these bubbles before they could harm anybody. Unfortunately, if they were responsible, they wouldn't be able to claim economic expansion.

 

Unfortunately it looks a bit like a Curates Egg.

 

Curate's egg - Wikipedia, the free encyclopedia

 

The expression "a curate's egg" originally meant something that is partly good and partly bad, but as a result is entirely spoilt.
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Go to the auctions.

 

The point being that this is yet another way that the social classes will become further divergent. Those who have expendible money will now be able to gobble up property like pac-man, and for minimal financial impact to their own wallets. There's a deeper issue at play here regarding intentionality of bad policy decisions for short term individual gains. Like driving down a corporations stock so you can buy a bunch of it before "fixing" the issue that drove it down. Then, after you've acquired a tremendous amount while it was cheap, the prices go back up, and you've done rather well for yourself. All while the lower classes keep struggling just to survive, let alone finally get ahead.

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There's a deeper issue at play here regarding intentionality of bad policy decisions for short term individual gains. Like driving down a corporations stock so you can buy a bunch of it before "fixing" the issue that drove it down. Then, after you've acquired a tremendous amount while it was cheap, the prices go back up, and you've done rather well for yourself. All while the lower classes keep struggling just to survive, let alone finally get ahead.

 

Hi Infi,

 

And in a 'free' market, the new owners of those relatively cheap assets/stock don't necessarily have to be from your own country.

 

We've been there and done that.

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Hi Infi,

 

And in a 'free' market, the new owners of those relatively cheap assets/stock don't necessarily have to be from your own country.

 

We've been there and done that.

Yes Laurie and Howard has just given China part ownership of a Uranium mine.

 

With the falling US $ there are sure to be some Asian and European and Arab bargain hunters- but usually -my experience of the Japanese- only the really top, prime, real estate sites.

I doubt if poor, social minority housing would appeal.

Farms yes because we will need them to grow bio-fuel, sequester carbon etc.

I just hope our battered Australian Family Farmers can hold out a little longer and the land doesn't end up in a yet another huge Agri-Business Portfolio (-which I note get most of the USA agriculture subsidies.)

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