Economics business.The Sub-prime Crisis. How bad is it?

[Michaelangelica]

Bad Subprime Bet Costs Morgan Stanley $3.7 Billion
Dow Jones
November 07, 2007: 08:31 PM EST

(Updates to add further detail of the trading bet at the root of the losses.)

NEW YORK -(Dow Jones)- Morgan Stanley (MS) said Wednesday it will take a $3.7 billion write-down to reflect a drop in the value of mortgage-related positions taken by its traders.

The hit, which resulted from a speculative trading bet with the bank's own money, could reduce fourth-quarter net income by about $2.5 billion, Morgan Stanley said. The bank said the loss could grow if markets worsen before its fiscal year wraps up at the end of November, and put its remaining exposure at $ 6 billion.

The write-down is in line with estimates made by analysts this week and well below the $7.9 billion in similar write-offs taken by Merrill Lynch & Co. (MER) two weeks ago and the $8 billion to $11 billion in additional write-downs announced Sunday by Citigroup Inc. (C). Morgan Stanley's remaining exposure contrasts with nearly $21 billion at Merrill and $55 billion at Citigroup.
. . .
"Not only are delinquency and foreclosure rates high, but recovery rates are coming in lower than what might have been hoped, and are likely to go even lower in the year ahead," the analysts wrote.

3rd UPDATE: Bad Subprime Bet Costs Morgan Stanley $3.7 Billion

Its tough love when you owe in India
Asia Times Online :: South Asia news - It hurts when an Indian bank loan goes bad

Woo hoo - Party on America! Like I said on Monday, the MSM is yadda yaddaing the bad news as the media zombies tell you to BUYBUYBUY because, without your money, they may have to finally face up to whatever’s hiding in their closet. CFC’s Angelo Mozilo, who originated 7% of the scariest of all financial instruments, the sub-prime loans, says there may be monsters in his closet, quite an admission from a guy who lost $1.2Bn last quarter and dropped his stock 60% (but not before executives sold $842M worth of their own shares). MER opened their closet and found $8.4Bn worth of things so horrible that they closed the door (admitting there might be more scary things inside but no one wants to look) and they fired the guy who got them there.

2007 October | Phil’s Stock World

[Zythryn]

Originally Posted by InfiniteNow

I just wish I had enough money saved up to buy a whole big bunch of the properties which are being foreclosed. To get a few score houses at 30-40% of their actual value, hold on to them, and potentially rent them out would really go a long way to making my future and my offspring's future economically and monetarily safer.

You couldn't pay me to be a landlord, even if the homes were free.
Especially in an economic downturn, possibly recession.

As for the housing bubble, there is nothing malign involved. It is just the latest bubble. Some people (both borrowers and lenders) getting greedy and making stupid decisions.
On its own, this would have a minor effect on the US economy. Combined with high oil prices and a low dollar, we could be in for quite the ride

[Michaelangelica]

Originally Posted by Zythryn

.
On its own, this would have a minor effect on the US economy. Combined with high oil prices and a low dollar, we could be in for quite the ride

The thing is it is not just a USA problem. Many loans were sold on to other banks so banks here and in many other countriesare exposed and also stand to make losses.
It is said when the US economy sneezes the rest of the world catches cold.
I don't think the exposure is too bad here but institutions seem to be keeping quiet about it so it is hard to know for sure.

Our inflation figures are up and both sides in the next election are promising tax cuts so that won't help. As inflation goes up so o does housing interest rates. It is now beginning to bite in our mortgage belt as people are selling up. We just pray the Chinese keep wanting us to dig up Australia and post it to them.

The prediction is US$ AUD$ parity by Christmas so expect a lot of Aussie tourist to spend money & complain about your beer soon.
Always willing to help the Yanks out when they get in over their heads.

[LaurieAG]

Originally Posted by Zythryn

As for the housing bubble, there is nothing malign involved. It is just the latest bubble.

Hi Zythryn,

The rate 'bubbles' have been developing in the new millennia is a real cause of concern. While this bubble may be benign the increasing rate of bubbles is most definitely not (an indication of too much money and not enough good investments?).

By reducing interest rates the Reserve risks creating another credit bubble in response to the housing bubble.

It would be much easier for everybody if the politicians actually regulated blatant speculation and prevented these bubbles before they could harm anybody. Unfortunately, if they were responsible, they wouldn't be able to claim economic expansion.

Unfortunately it looks a bit like a Curates Egg.

Curate's egg - Wikipedia, the free encyclopedia

The expression "a curate's egg" originally meant something that is partly good and partly bad, but as a result is entirely spoilt.

[InfiniteNow]

Originally Posted by Qfwfq

Go to the auctions.

The point being that this is yet another way that the social classes will become further divergent. Those who have expendible money will now be able to gobble up property like pac-man, and for minimal financial impact to their own wallets. There's a deeper issue at play here regarding intentionality of bad policy decisions for short term individual gains. Like driving down a corporations stock so you can buy a bunch of it before "fixing" the issue that drove it down. Then, after you've acquired a tremendous amount while it was cheap, the prices go back up, and you've done rather well for yourself. All while the lower classes keep struggling just to survive, let alone finally get ahead.

[LaurieAG]

Originally Posted by InfiniteNow

There's a deeper issue at play here regarding intentionality of bad policy decisions for short term individual gains. Like driving down a corporations stock so you can buy a bunch of it before "fixing" the issue that drove it down. Then, after you've acquired a tremendous amount while it was cheap, the prices go back up, and you've done rather well for yourself. All while the lower classes keep struggling just to survive, let alone finally get ahead.

Hi Infi,

And in a 'free' market, the new owners of those relatively cheap assets/stock don't necessarily have to be from your own country.

We've been there and done that.

[Michaelangelica]

Originally Posted by LaurieAG

Hi Infi,

And in a 'free' market, the new owners of those relatively cheap assets/stock don't necessarily have to be from your own country.

We've been there and done that.

Yes Laurie and Howard has just given China part ownership of a Uranium mine.

With the falling US $ there are sure to be some Asian and European and Arab bargain hunters- but usually -my experience of the Japanese- only the really top, prime, real estate sites.
I doubt if poor, social minority housing would appeal.
Farms yes because we will need them to grow bio-fuel, sequester carbon etc.
I just hope our battered Australian Family Farmers can hold out a little longer and the land doesn't end up in a yet another huge Agri-Business Portfolio (-which I note get most of the USA agriculture subsidies.)

[Qfwfq]

Originally Posted by InfiniteNow

The point being that this is yet another way that the social classes will become further divergent. Those who have expendible money will now be able to gobble up property like pac-man, and for minimal financial impact to their own wallets. There's a deeper issue at play here regarding intentionality of bad policy decisions for short term individual gains. Like driving down a corporations stock so you can buy a bunch of it before "fixing" the issue that drove it down. Then, after you've acquired a tremendous amount while it was cheap, the prices go back up, and you've done rather well for yourself. All while the lower classes keep struggling just to survive, let alone finally get ahead.

All obvious, and a good reason for people to put the cash together and take the same opportunity instead of all letting a few speculators beat them. The real trouble is just the way the real estate market tends to be. When you say "at 30-40% of their actual value" what is meant by their actual value? Don't just look in the estate agency's windows, without seeing how houses are actually selling. If you ask a million for a shack but no one buys it, is that the shack's actual value? There's a reason why the auctions are being concluded at low prices.

By what I've read about the subprime speculators, they don't even need to hold as you conjecture. They sell their acquisitions easily enough to people who've been looking through the real estate agencies and simply don't go to the auctions. Those who bought from the auctions give a slightly better deal and the profit is quick and easy. The less people there are at the auctions and the more of them that buy without going to them, the greater the discrepancy. Just an example of how infallibly market law makes price equal to value.

[Michaelangelica]

The fallout (ripples? sunami?) from this is going all over the world
eg

TOKYO, Nov 9 (Reuters) - Japan's Mizuho Securities, the unlisted brokerage arm of Mizuho Financial Group (8411.T: Quote, Profile, Research), may have suffered as much as 100 billion yen ($889 million) in subprime-related losses, causing a delay in its planned merger with Shinko Securities Co Ltd (8606.T: Quote, Profile, Research), the Nikkei newspaper said on Friday.

Mizuho Sec may see 100 bln subprime loss -paper | Reuters

Barclays shares slump on credit worries
Barclays Capital boss Bob Diamond may need to show the bank's balance sheet.
£77.5m 'golden goodbye' for Merrill chief
Bond insurers may trigger new panic
The music has well and truly stopped
Le Crunch is by no means over
Master of the universe falls back to earth
How Citi failed to keep the crisis at bay
Fed will cut rates to 4pc if necessary
O'Neal trampled underfoot by credit crisis
Dollar weakness not a storm in a tasse de thé
Ian Cowie: The greenback wilts

Above are all links to stories in the British Telegraph HERE:-
Subprime - Telegraph
A lot of US articles here (life is too short)
FT.com / In depth / Global credit squeeze

and
Reports from the front seem a little slow to come in (I guess this gives the Directors time to sell their shares first?)

AIG, Morgan Stanley latest to face subprime heat

Sponsored by:
MS 53.68, +2.49, +4.9%) was also in focus after the investment bank late Wednesday said it was taking a new $3.7 billion hit to account for exposure to subprime-mortgage securities. The company said it had $12.3 billion of subprime-related exposure on its balance sheet at the end of August. See related story.
. . . Some analysts said the company's exposure to subprime was manageable and, at the least, provides more transparency.

How is 12 billion manageable? That is an awful lot of money
for AIG it was a mere 2.45 Bil

[Michaelangelica]

Yen shock may prompt next wave of market crisis

The global financial system supercharged historically low central bank interest rates in recent years in several ways but there were three powerful injections.

One was through repackaging bank loans into securities for sale to a wide range of investors, freeing up bank balance sheets to allow them to lend more. Those markets are now in meltdown after a U.S. mortgage market bust called into question valuations of these complex instruments.

The second was via leveraged buyouts by the likes of private equity firms, who used cheap credit to raise cash and pumped billions into stock markets via a wave of takeovers. The credit squeeze has put much of this activity on ice.

Yen shock may prompt next wave of market crisis | U.S. | Reuters