Everything 'Subprime Crisis'

Got a term paper to write on an international financial crisis? Need a quick background on CDOs and the US Subprime Crisis but don't have time to read? Curious as to the spillover effects of a crisis in other markets?

Over the past 10 years or so, banks have been securitizing their debt obligations. What that means is that they've reduced their on-balance obligations and moved it off-balance sheet. These obligations are contingent liabilities. Basically, the banks lend only their reputations and names but the ultimate lender isn't them since they're just the middleman who brokered the deal. The bulk of all that risk is the person who bought that unit of securitized asset. The problem is that some banks have been writing cheques or using these debt assets as capital. In times of crisis, these kinds of securities are largely insolvent. To make things worse, we're not entirely sure who bought what and used what type of asset to back up those purchases.

In an earlier interview dated 31 July 2007, Satyajit Das replies to Stephen Long's comment:

STEPHEN LONG: The counter-argument is that that means that the risk is diversified, the risk has been spread so far and wide that the fallout won't be so bad.

SATYAJIT DAS: That ironically is what the central bankers have believed. It should be said that investment bankers and many pundits have been telling central banks that's the case. In fact, my view is exactly the opposite.

What has happened is that banks have essentially sold the risk out of one part of the bank to these investors, but there's other parts of the bank which have then used the securities which reference these underlying risks, and what they've done is lent money against that.

And the irony is the risk is now concentrated among very, very few banks, 'cause the people who do this, it's an activity called prime broking, are very, very few banks, less than ten.

Read the interview transcript.

URL: http://www.abc.net.au/worldtoday/content/2007/s1992847.htm

Also, Australian Broadcasting Corporation's 'Four Corners' program has good coverage as well as insight on this topic.

Watch the interview with Satyajit Das. Its a good exposure on an important finance topic about the transfer of risk exposure off the balance sheet - to be bought piece meal by investors who want exposure to this kind of risk.

URL: http://abc.net.au/4corners/content/2007/20070917_subprime/interviews.htm

Here's the teaser -

Video On Demand: "Mortgage Meltdown"

Last month an unfamiliar expression appeared in the Australia media. A "subprime mortgage crisis" was unfolding in the United States. Homeowners across America were defaulting on loan payments and economists warned of major financial fallout occurring anywhere from Paris to Beijing to Melbourne. But why should a foreclosure in Cleveland affect a hedge fund in Sydney?

As Four Corners reports, Australia, along with the rest of the world is at risk of a virulent economic virus thanks to financial globalisation where everything is interconnected through a sophisticated form of pass the parcel. And even more alarmingly, no-one knows just how bad it might get.

In "Mortgage Meltdown" Paul Barry reports on the fallout from the US subprime mortgage crisis and asks what impact it will have on Australia.