Luminous

iTrader: (3)

I was just reading this article on the BBC site (copied below for those who are lazy). BBC NEWS | Business | World shares fall on credit fears I don't understand what the issue is. When a financial institution offers a mortgage they take the property as a security. If mortgagor defaults on the loan then the house is repossessed to recover the institutions money. Only in a severely falling market will the financial institution loose money (negative equity).

This is not meant to be a house price crash thread. I know house prices have eased in the US recently, but is the whole global market economy so fragile that losses in a tiny sector in just one country cause a massive crash? Just why is the EU putting in £64b to try and support the market? That is a whole heap of cash to inject just because some US financial institutions MAY start to make some loss. Surely the amount injected more than covers the losses they may make?

Article below:
Markets have faltered in Friday trading a day after markets in the US and Europe suffered heavy losses amid fears of a global credit crunch. By the close of trade in Japan, the Nikkei share index was down 406.5 points, or 2.4%, at 16,764.1.
Japan's central bank followed the European Central Bank in pumping money into the market to boost liquidity.
In London the benchmark FTSE 100 opened nearly 2% lower, the French Cac opened down 1.83%, and German Dax down 1.9%.
It comes a day after the FTSE closed down nearly 2%, and following an overnight decline of close to 3% on the Dow Jones index in New York.
The Bank of Japan injected one trillion yen ($8.5bn; £4.2bn) into the financial system on Friday.
Many more financial institutions may come out in the future to say they have been making losses on the back of the sub-prime problems


Martin Arnold, CommSec



Q&A: Sub-prime lending


Global markets have been rattled by worries over financial institutions' exposure to bad credit in the US sub-prime mortgage market.
In Hong Kong the Hang Seng index ended the day down 2.88% at 21,799.96, after trade was suspended early because of a tropical cyclone warning.
South Korea's central bank said it would also intervene if necessary in financial markets to counter the international turmoil.
Central banks in several countries have been intervening in the money markets to prevent a continuing problem with US housing loans turning into a global financial crisis.
The Reserve Bank of Australia on Friday added more than twice the usual amount of money into the banking system, injecting A$4.95bn ($4.19bn; £2.08bn) in its regular morning money market operation.
Investors have bought the financial equivalent of poisoned mutton dressed as prime lamb




Read the BBC's Robert Peston on US 'toxic' sub-prime loans


Central banks in Malaysia, Indonesia and the Philippines intervened to sell dollars to support their currencies.
On Thursday the US's main Dow Jones index fell 387.18 points, or 2.8%, to 13,270.68. The S&P 500 shed 3% and the Nasdaq lost 2.2%.
European indexes had slumped earlier after BNP Paribas froze three funds, saying the market for some of the assets they contained had disappeared.
The European Central Bank injected a record $130.6bn (£64.6bn) into Europe's money markets to prevent a financial system seizure.
And on Friday it made a further 61bn euros contribution to the eurozone banking market, in what it said was a "fine tuning" operation.
Tha bank said the move "follows up on the operation conducted yesterday and aims to assure orderly conditions on the euro money market".
Traders are trying to work out if the current problems will continue


In the US, the Federal Reserve was reported to have taken similar action, pumping about $24bn into the US banking system.
Analysts said that the markets would remain volatile in the near future.
"The nervousness has been brought on by the perception that many more financial institutions may come out in the future to say they have been making losses on the back of the sub-prime problems," said Martin Arnold, equities economist at CommSec.
Housing market wobble
BNP Paribas announced on Thursday that it was suspending three investment funds worth 2bn euros because of problems with the US sub-prime mortgage sector.
Sub-prime lenders offer loans to consumers with a poor credit history.
You're looking at the foundation of a marketplace that has imploded somewhat


Steve Goldman, Weeden & Co


In recent months, the number of loan defaults has increased because of higher interest rates, raising concerns that the wobble in the housing market will affect other parts of the economy and then start hurting other nations.
The worry is that should banks make losses, it would hurt their earnings and their profitability, making them less willing to fund the takeovers and buyouts that have underpinned much of the stock markets' recent gains.
The recent collapse of American Home Mortgage, the 10th largest lender in the US, has intensified those concerns.
At the same time, banks have suddenly started charging significantly more for the money they lend to each other, signalling that they are looking to limit their risks, analysts said.
Analysts say that a credit crunch - when it becomes harder for banks, companies and consumers to get access to loans and cash to run their operations - is a serious occurrence that could lead to a recession.
The declines in the US markets came despite attempts by President George W Bush to calm market fears.

FlightMan

As Hagrid says to Harry in the latest film:

"There's a storm coming Harry, and we must be ready when she does."

NACRO

As I understand from my perspective as someone who deals in small amounts for fun and profit the reason this credit scare is depressing markets is that the fear is private equity firms who've been driving the current boom won't be able to borrow any more cash to gamble on the stock market. This could trigger a crash which explains why central banks are currently pumping huge sums in and people like me are taking it from them in profit

Hopefully a professional can explain better....

Petem95

I think basically, banks are becoming very reluctant to lend each other money because they don’t know what kind of poor investments their rivals have made (ie just look how stupidly easy it's been to borrow vast sums of money over the past few years - 6 x salary mortgages, massive company buy-outs etc).

Things are now going t1ts up as debt levels were not sustainable, so everyone wants to reduce their exposure to debt, and as a result funds who have been heavily involved in debt such as sub-prime mortgage lending are going under.

Nobody wants to take on further debt, so say private equity firms want to borrow a big sum for a buy-out, they cant because nobody will take on the debt. Result? The companies stocks dont look so rosy as the firm wont be rapidly growing and also the target company shares fall as they are nolonger a buyout target.

Debt levels have been stupid for some time in the West, so this situation has been predicted for a long time (just dig out one of the many scoobynet house price crash threads!) but it does now seem to be happening.

Its quite a complex situation however - I'm sure someone with more in-depth financial knowledge like Suresh or one of the others on here will come along and explain better!

Luminous

iTrader: (3)

Those are some good explanations. Personally I am always staggered at the volatility within the stock market. From my point of view, there have been some stupid lenders in the US giving out really large mortgages to people who have a poor credit history. It comes of no great big shock to me that these people are defaulting, quite how that surprises the rest of the financial industry just boggles me.

Imo, the rest of the industry should expect that high risk investments may fail, and therefore plan for this. A prime example of high risk being lending huge mortgages at high LTV to people with a poor credit history

The fact the this sector is not going well would not stop me investing in a different sector, but I guess I don't full get how it all links together. It is complex and sometimes I feel it is too complex that little blips have big effects..eg storms.

Anyway, just how do you make profit from all those central banks injecting cash As I understand it, they are injecting cash into the money markets. This keeps the cost of acquiring debt lower, which allows the companies that need it to keep borrowing. You would still have to predict which companies were going to be using this finance for takeovers etc just as you would have done before?

stilover

I've just had a huge row with my mother over all of this.

Months ago my Gran died, and left quite a bit of money behind. Half of that was tied up in shares. The Probate came through weeks ago and instead of cashing them in (which she wants to) she's been sat on her lazy @rse as she couldn't be bothered to sort it all out. Now Share prices are falling, she's already lost a few thousand pounds.

Is she going to sort it out today or Monday? No. "I'll get round to it when I get chance". While sat in the back garden today doing F*ckall !!!!

So she'll either cash them in when she's lost Thousands more, or have to wait potentialy years (if there is a major crash) for the price to go back up.

So F*cking annoying. I hate it when people take weeks/months to do the simplist things.

Leslie

Maybe many countries' economies are built on credit like ours is and it is approaching the time of reckoning up! I reckon its a bit of a worry except for those who have been stashing it away in offshore accounts!

Les

fast bloke

It would take about three months to explain the heap, but basically financial institutuins have to maintain a certain level of liquidity (cash), on which they make little or no profit. The try to maximise profit by keeping as little cash as possible. A very small tilt over the liquidity limit (caused by defaults in the sub prime market for example) means that te financial institutions have to get cash from somewhere else to maintain their liquidity. First stop for this is the stock market - they will be forced to start selling off stock. When central banks across the world announce that they are pumping money into thier financial systems, that is a signal that the big players in the stock markets are about to be forced to start selling. All the medium sized players (fund managers etc) don't want to be left holding falling stock, so they start selling off. This in turn throws the institution liquidity further off balance as their easily liquidised assets (stock) is worth less so they have to sell more to balance it out. Also, the lenders won't be able to lend more while they reamain below the liquidity threshold, so they are basically stuck in the position unless central banks bail them out. Following on from that, if they can't lend money, people can't buy houses. House prices will drop, people will get into negative equity. That is only a problem if you want to sell or can't pay the mortgage. If BoE keeps increasing rates, there will be many people who can't pay the mortgage, so repossesions will increase (this is fairly much unrelated to the global credit crunch as it is controlled at a 'local' level) Reposession of a house which is worth less than the balance of the mortgage will lead to a loss for the lender. If they have sufficient MIG policies in pace this won't be a problem, but as there is no requirement for a MIG on a mortgage at less than 75% LTV there could be times when the bank makes a loss. This is basically back where we started again.

The cycle can be broken if financial institutions can regain the balance of liquidity without causing panic selling of stocks and property. If everyone had the same reaction as Stilovers Mum there wouldn't be a problem. If everyone has the same reaction as Stilover the thing will spiral downwards very quickly

FlightMan

Stilovers mum for BoE chairman?

Petem95

Nah lets have Stilover as chairman - its about time we hit the 'reset' button! All this living beyond our means on credit has gone silly!

Saying that the firm I work for is owned by private equity, and grows through acquisitions so this will seriously put the brakes on its growth!

David Lock

Doesn't China have a load of spare cash at the moment?

Surprised they are not putting more of this into the US market as part of their take-over-the-world campaign. I see that have already started in Africa.

Robert Rosario

[
The cycle can be broken if financial institutions can regain the balance of liquidity without causing panic selling of stocks and property. If everyone had the same reaction as Stilovers Mum there wouldn't be a problem. If everyone has the same reaction as Stilover the thing will spiral downwards very quickly[/quote]


Very true. Clients are getting the shakes, largely due to media frenzy and exaggerated reporting. Sure, there are short term issues, but after a nigh on four year bull run, people have forgotten that it is not all one way.

Even some private investers are buying into gilts which last month were one of the only main asset class to show positive returns.

Stilover's mum, or indeed anybody calling the market is dangerous.

Next month's US interest rate decision is crucial, but have also heard that there may be an emergency meeting of the fed to try and calm markets.

Interesting times.

Longjing

Interesting, but in context things are not very disturbing. Interest rates are still low in a long term context, and a bit of credit tightening is probably overdue given the extreme slackness of some bank lending of the past few years.

I don't think it has anything to do with private equity firms. leveraged buyouts have been going on for decades and upsetting unions for about as long. It's just one example of corporate lending, and private equity deals are much less sensitive to market sentiment than those involving public companies. That's the point really, or part of it.

If you ask me, the principal driver of the current anxiety is a sense among lenders that they've got too loose in their lending, which is arguably true in both asset-backed and corporate lending... lower loan-to-value ratios in the former and much lighter borrower covenants in the latter. So the pendulum swings and lenders generally tighten credit and credit terms.

We're seeing the sub-prime market go wobbly - unsurprising because they are by definition risky loans - but what's spooky is the idea that there will be wider defaults and more widespread corporate failures (i.e. a sense that this is the beginning of something and not isolated to dodgy US mortgages). Hence general jitters.

There are many other factors and I'm sure I don't know the half of it if that. Things like a sense that a market correction has being waiting to happen for a long time affect investor sentiment and reaction bad news. Equally, the exposure to the sub-prime loan failure is much wider now, because of the clever ways lenders now spread their credit risk with CDOs and so on. The effect of that seems to be that any given bank is less likely to go bust... because the pain is spread around hedge funds and institutions.

Spoon

Largely it's all a game and somebody influential said to someone else, who likes to gossip, that he'd like his ball back.