Subprime fact of the day

by on August 13, 2007 at 4:55 pm in Economics | Permalink

..the problems in the subprime mortgage market are relatively small. 
Currently, losses are estimated to be at most $35 billion – equivalent
to a stock market decline of about 0.2%.  (Last week the value of stocks
traded in US markets were down a not terribly unusual 1.5%, or 7 times
the total expected decline in the value of these mortgages).

That is from an excellent short essay by Stephen Cecchetti.

Addendum: Michael Mandel gives his look at the bright side.

1 angus August 13, 2007 at 5:17 pm

Stephen Cecchetti

2 David Zetland August 13, 2007 at 5:36 pm

The subprime thing IS big because it’s the canary for the HUGE raft of Collateralized debt obligations (CDOs) that are a web of unknowns (and unknowables). A lot of hedge funds are going to see their “equity” evaporate when CDOs are marked-to-market. (They are avoiding liquidation now to keep their fantasy prices intact.)

This may be a good post to save when you need humility in the future 🙂

3 Barkley Rosser August 13, 2007 at 6:48 pm

CD,

Not if those losses trigger losses on associated
derivatives, which in turn trigger losses on other
derivatives, which in turn trigger further losses.
Last fall, NY Fed prez Geithner complained about
the opacity of the set of interrelated derivatives
out there and how, in effect, he had no idea what\
the heck was going on. That we see BNP suffering
from problems in the US subprime market is exactly
the problem.

Think how a some minor problems at the Vienna
Creditanstalt in spring of 1931 led it to collapse,
led to the collapse of German banks, then French
and British banks, then US banks, then Japanese
banks, with the upshot being turning what had
been an unpleasant recession into the Great
Depression.

But then, perhaps this was Tyler’s point, to
remind us how small initial problems can lead
to really big and nasty outcomes in interlinked
financial markets…

4 shawn August 14, 2007 at 7:58 am

omodudu…help me out; of COURSE it’s a problem in real estate, because 100% loans to subprime borrowers increases the pool of potential customers (and potential closing costs) to the glut of real estate agents.

5 spencer August 14, 2007 at 9:38 am

Stephen Cecchetti did an outstanding job. But where I would disagree with him is on the economic outlook. He says there is no change. But there is a very significant change showing up in credit spreads. The market is starting to become a “credit snob”. This will show up as slower growth because fewer people will get credit.

6 James Van August 14, 2007 at 9:59 pm

The Synthetic CDO structure looks very similar to a bank, and Synthetic runs on those mini-banks have been behind the drying up of liquidity. That’s the same problem for banks in China, and we call it 我们是一家上海翻译公司。

7 无缝管 November 13, 2007 at 8:22 pm

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8 ignu April 22, 2008 at 11:49 pm

So, this is all about chained-debts with just a mere percentage of the initial capital going down and everything blows out of proportion.

BTW, who the hell invented this economic model anyway? And why bo international banks with all their PHDs and MAs subscribed to this model??

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