Does this sound like what's happening in the financial markets?

Question

sub-prime mortgages ballooned from a marginal, once in a blue moon product to big business in the past 5 years.

in that period, there hasn't been a real estate market downturn, nor an interest rate cycle, nor a recession.

so, the financial markets have no experience to rely on when they estimate what proportion of these sub-primes might prove to be losses. It could be 3% or it could be 30% -- there just isn't much to base an estimate on.

but the volume is large ... 100 billion or more in assets at book value.

so the markets don't know if this is a 3 billion or 30 billion loss.

and when the markets don't know, what they do is refuse to buy the stuff. and refuse to buy stocks that rely on the stuff.

therefore, mortgage houses, investment bankers, hedge fund sponsors, and traditional banks shares and commercial paper are all being shunned until we know more about the size of the losses.

the most specialized mortgage shops are hardest hit.

good thinking??

Answer 1

That's part of it. There's a really good article in Salon this week which explains the macro view in laymen's terms. You should find it interesting. Link below.

Answer 2

Yes, this is a big part of what is going on. It started out with subprime mortgages and the securities that have subprime mortgages as the underlying collateral like MBS and CMOs, but it has become more of an overall liquidity crunch. Hedge funds that buy these securities won't buy them anymore and are trying to value their assets. There may be more concentration risk than they thought. Alot of buyers of these securities are also not buying junk bonds anymore.

It is impacting consumer confidence, overall spending and many believe will bleed over to GDP growth. Banks are also more conservative in the leveraged loan markets, so all those LBOs that have been running up the M&A and stock markets are cooling because none of the private equity firms can now get the cheap bank loans they were in the past 2-3 years.

Now the money markets that were financing the short term borrowings for the institutions are refusing to buy the money products like CP and resulting liquidity crunches are putting the mortgage originators into bankruptcy.