Up till early this year I had never heard of US subprime lending. On hearing the detail, it left me with a sense of wonderment.
You mean, the borrower lies about his income (no job, no income, no hope) and the lender offers exceptionally low 'teaser' interest rates, with the proviso of these going up by half (!) within two years?
And nobody screamed?
And then they took such loans, bundled them with better loans, sliced and spliced the end result like so much rope, got rating agencies to apply the last rites, and sold them on to unsuspecting institutions looking for yield enhancement (a little extra margin, magnified sixteen times by leveraging, so that anything small really started to look impressively large)?
And that house of cards was supposed to remain intact?
If you have never tasted snake-oil before, this was your golden opportunity.
About a $1 trillion of the stuff was written, first Fed estimates are that $100bn will go bad, but add the misadventure of any misguided leveraging, and the final bill will be about $250bn.
That would have sunk the US banking system. But because banks securitized and offloaded the stuff faster than they generated it, relatively little stuck to banks, except to the extent that their asset management funds invested in such stuff.
Anyway, the $250bn is spread around the world, at least 10% in Japan, a goodly portion in Europe and a fair amount in lower Manhattan. The losses will rest where they fall. Rest in peace.
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