There were several articles identifying a nice little earner, a wheeze, that appears to have started to decompose at the heart of the beast!
You may not be familiar with the term subprime. Think high interest lending, think doorstep lending, no put that baseball bat away, it is all perfectly legal, just a little usurious, allegedly. Subprime in the US includes a lot of iffy mortgages, or ‘overvalued junk debt’ as some commentators would have it.
What do you do if you are a poor struggling banker with voracious and unrelenting shareholders to feed and a high junk habit of dodgy debt to support?
Well the first thing you can do is turn to the Subprime Warriors. These guys will take your debt which is, let’s say, less than colourful, and wave their ‘high tech wands’ over it. Suddenly, something which looks as bankable as a three legged dog at The Stow becomes collateralised debt obligations, CDOs (never mind the quality, feel the width, it sparkles, it gleams) and you can sell it on like hot cakes because it is repackaged with bonds and all manner of beautiful things; sliced diced and presented with a variety of risk attached!
Sell me another, Tory!
It has not been a quiet week in Moneytown.
US regulators issued guidance for the moneymen to
“lay off de liddle guys with de bad debts, ok!”or words to that effect.
Pangs of conscience for homes lost, lives ruined?
Vulture Capitalists going vegetarian, vegan even?
Not quite Chancellor Copper!
Investor jitters about a credit crunch, the Old Lady herself warning of the vulnerability of the global financial system point to the possibility of more than a slight ‘market correction‘. Eyes have rolled, heads even, hands have been wrung, warning bells have been rung, prodigal chickens have been seen roosting, sacrificial calves have not been fattened, deals have faltered……
Yeah, yeah… split caps; Enron; Blah Blah Blah; BCCI; Blackwheneveritwas; the end of capitalism as we know it, Jim?
Possibly not but consider this.
Our man Lex at the FT points out that while the usual suspects may claim ‘nothing major has gone wrong’ he estimates that losses from CDOs and junk loans for leverage buy-outs could break the $100bn barrier.
Is this good, bad or indifferent and change?
Not good!
US banks, as quoted in Lex’s column, are estimated to have $850bn capital.
(That’s one matchstick for every $100bn and split the last one in half. No, it doesn’t matter if it is the half with the red bit on.)
But the banks won’t take the hit alone. This will be spread across alternative vehicles where liquidity and capacity needs are not currently known or clearly understood. Good for the banks but probably not very good for us then, a rotting pile of paper and a bad smell coming from god knows where. I bet those poor struggling bankers feel a bit more comfortable now though.
Spot the new kids on the block with the big bonuses and the shiny, shiny cars.
Subprime Warriors!
Me, I’m here in the kennels at The Stow; looking after this three legged mutt that has such a sweet face.
