Unless you’ve been living under a rock, or just fallen out of a tree, the increasing rate of default in US Subprime Mortgages, could have far reaching implications.
It’s now apparent that well known banks and Wall Street firms are affected because they securitized the loans i.e. extended credit or short term loans to subprime lenders, or bought collateralized mortgages to hold in their own portfolio or, as is widely suspected, used subsidiary companies to write their own subprime mortgages.
Their stellar earnings that these finance houses reported over the past few years may be due to subprimes. The feeling is that Wall Street was just too close to subprime mortgage lenders, deliberately recommending to investors to buy their stock.
Simply put, every debt that the subprime mortgage companies owe to banks and Wall Street firms, are carried in the latter’s books as an asset. If the loans remain unpaid, the banks and Wall Street will have to “write down” the value of those assets from their Balance Sheets.
Effectively, billions of dollars of corporate value disappears – and that will shake the US economy.
It also results in a liquidity crisis for banks. They will reduce the number of new loans and impose tighter criteria for borrowers. Of course, it begs the question, why this wasn’t done earlier and to what extent subprime lenders, banks and Wall Street fuelled a bubble in the subprime market. In case you hadn’t realized, subprime mortgages are given to those with very damaged credit histories.
© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved
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