Today's picks from there: Goldman Sachs predicts a $2 trillion cut in future lending. What this means is - there may be a hit to banks' capital, which can take their capital down $200 billion (assuming just half of the total hits their balance sheets). If banks leverage their capital 10 to 1, they are going to stop lending to the extent of $2 trillion.
This is assuming that they can't find the $200 billion to recapitalise, (And $200 billion is not a small amount) and that there is no macho rescue event by the US Fed. And this is perhaps conservative as banks leverage higher than 10 to 1.
Another interesting piece, quoting from a Fed Governor's speech:
First, the bulk of the first interest rate resets for adjustable-rate subprime mortgages are yet to come. On average, from now until the end of 2008, nearly 450,000 subprime mortgages per quarter are scheduled to undergo their first reset, eventually causing a typical monthly payment to rise about $350, or 25 percent. Second, the weakness in house prices and the resulting limit on the build-up of home equity will hinder the ability of subprime borrowers to refinance out of their mortgages into less expensive loans; as a result, more borrowers will be left with a mortgage balance that exceeds the value of the house.Very interesting conclusions further there. Good read.
Related posts:
- Is this blog for short term investors? Prem Sagar has posted a review of my blog. His...
- New place, same blog I've moved my blog's location - you will now see...
- Subscribe to this blog by email Okay, this one is a "PR" type post. Instead of...
- Adding Twitter to my blog Like Kaushik, I'm adding Twitter to my blog sidebar. Note...
- Infosys Q2 2007 Results: Bad? Infy's Q2 results were out on Thursday, when they were...
>Hello. I agree that Calculated Risk is a good blog.
11.16.07 at 9:36 PM
>US housing markets are in a tailspin for sure. I am an advisor (and was its interim CEO) of an online real estate company here in CA, and we see the effects of the mortgage crisis on a daily basis. Let me provide my 2 cents since you wish to know more about the US housing fundas.
The article alludes to problems arising in the “prime” area in 2010 or so. This is understating the problem. The effect on “prime” borrowers is going to start appearing as early as summer of 2008. This bubble is going to make the dot-com bubble look like a Walk in the Park, as hard as that may be to believe. That’s because the dot-com bubble affected a somewhat narrow range of the population. The housing bubble affects everyone because of two factors: 1) Homeowners come from all walks of life and 2) The looming “Second Mortgage” crisis.
A little mentioned fact is that homeowners across the country (more than 80%) have taken out second-mortgages by way of a Home equity Line of credit. When prices were appreciating, equity was being created in homes, and lenders made a beeline to provide capital and coax consumers to “take equity” out of their homes. Their lending decisions were even more lax compared to people’s “first mortgages”, and they came up with fantastically exotic second mortgage products. An example of a fantastically exotic product is below –
1. Original value of house = 500K
2. Mortgage outstanding = 450K
3. Market value (due to price increases) = 700K
4. Theoretical equity built into home (3-2) = 250K
Technically, second mortgages were given upto 80% of equity built into home, which in this case is 200K maximum. But lenders were greedy, and they assumed prices would increase forever in their models. So they would give second mortgages of perhaps 350K or 400K, and give a teaser rate of 2% interest for the first year or two. The paperwork for these things are so long and so unreadable, most consumers just signed these things. As you can imagine, this is a disaster in more ways than one. House prices have crashed, earlier appraised values are no longer valid, consumers have borrowed this money and spent it eons ago, and now they are faced with resetting interest rates, and lastly the equity they have built is wiped out and are now faced with a situation where even if they sell their homes they cannot pay back these first and second mortgages. This phenomenon is already beginning to hit the “lower prime” but its not front page news yet, but will be in about 6 months or so.
How can this happen in America ? is what people ask. Did we not learn anything about the speculative Dot-com bubble ?? Well, the fact of the matter is It can ONLY happen in America. As a Professor of Wharton s eloquently put it ” In America, we are addicted to bubbles, we need Bubbles like a cocaine user need cocaine. If one bubble bursts, we just move to the next”
Hari -
11.17.07 at 1:00 AM
>I have been regular reader of Calculated Risk for the last one year. It is a good blog but mildly bearish. FYI Tanta (the lady) blogger is suffering from cancer.
Your blog also seems to be quite good. But I suppose you have turned bearish off late and a bit emotional too. But keep up the good work.
11.17.07 at 1:48 AM
>Deepak,
Two things may affect Indian sensex.
1.Mortgage prob may cut lending by $2 trillion: Goldman Sachs
2. Sebi paves for short-selling by MFs – Don’t know the exact dates.
Markets will be volatile in the days to come and may go down as fast as it had risen.Your bearish sentiment is understandable :)
11.17.07 at 3:57 AM
>Most of the economists and fund managers in the US have spent their entire career under Greenspan. For them, it is unthinkable that stocks will go down in the medium-term or long-term. Whenever there was a problem, Greenspan got the rates down and everything seemed to bounce back. Hence the talk that the US economy is resilient, and should stay invested as stock will ultimately go up. So everybody should buy on the dips.
However, I think most people haven’t understood the real crux of why the US market went up from 300 something in 1982 to 6000 by 2001 – the technology revolution. I believe tech opened up a whole new sector with seemingly endless earnings growth due to demand and productivity gains. Server tech in the 80s. PC software companies in the 90s. And SaaS companies along with the housing bubble. It was tech that drew the stock market up, created demand and pulled up other boats on the way. Lower rates certainly helped, but not as the primary cause. They merely helped fuel more money into tech.
However, I would say that cycle has run out. The tech machine cannot get the US out of this downtrend. In fact, it was spent in 2001, and housing was the only thing that replaced it.
Looking forward, I don’t see anything that can take tech’s place. Not clean energy (as unlike tech, solar/wind tech etc cannot allow everybody to participate by being employed in these industries due to hard-engineering skills required, unlike programming).
The best example I can point to is Japan. Towards end-1989, Nikkei was at 38,000. It went down to 22,000 by 1996. Many people called it the greatest long-term buying opportunities. Where is it now? – 15,000. Touching 7600 in 2003!
The US is the only place where you can say that in the last 30 years, stocks ultimately went up. But that era is over.
Btw Deepak, along with my calculatedrisk suggestion last time, a few more additions
http://suddendebt.blogspot.com/
http://accruedint.blogspot.com/
Check the archives of these 2.
11.17.07 at 12:13 PM
>good advicing website: technicalwealth.com
11.26.07 at 7:38 AM