Sub Prime Market

Sub Prime Market Financial titans believed that they were creating more than mere profits. They were confident that they had invented a new financial model that could be exported successfully around the globe. ‘the whole world is moving to the American model of Free enterprise and Capital markets’ Sandy Wells of Citygroup said in mid 2007. But while they were busy evangelizing their financial values and producing dizzy sums the big brokerage firms were bolstering their bets with enormous quantities of debt. Wall Street firms had debt to capital ratios of 32 to one. (One dollar in the bank and issuing backed by that single dollar- thirty two brand new dollars of debt to be repaid and to produce interest for the thirty two dollars) When it worked, the strategy worked spectacularly well, validating the industries complex models and generating record earnings. When it failed however the result was catastrophic. The Wall Street juggernaut that emerged from the collapse of the dot com bubble (90s) and the post 9-11 downtunr was in large part the product of the cheap money. The saving glut in Asia, combined with an unusually low US interest rate under Fed Reserve Alan Greenspan (which was intended to stimulate growth following the 2001 recession) began to flood the world with money. (And I got a morning tea! Our Courier Drivers were visited by these people with the cheap money encouraging us to take out a loan with them- And hence the morning tea! The year was 2007 and I told a salesman it couldn’t and wouldn’t last but the cakes were nice- thankyou!) The crowning example of the liquidity run amok was the sub prime mortgage market. At the height of the housing bubble, the banks were eager to make home loans to nearly anyone capable of sign in the dotted line. With no documentation a prospective buyer could claim a six figure salary and walk out of a bank with a $500.000 mortgage topping off a month later with a home equity line of credit. Naturally house prices skyrocketed and in the hottest real estate markets ordinary people turned into speculators, flipping homes and tapping home equity lines to buy SUVs and power boats. At the time Wall Street (But never this writer- I didn’t I thought them idiots) believed fervently that its new financial products- mortgages that had been sliced diced and securitized had diluted, if not removed the risk. Instead of holding the loan on their own the bank split it up into individual pieces to investors collecting enormous fees in the process… the bankers gorged on it buying mountains of mortgage backed assets from one another . but it was this new interconnected ness among the nations financial institutions that posed the biggest risk of all. As a result of the banks owning various slices of the new fangled financial instruments, every firm was now dependent on the others- and many didn’t even know it. If one fell, it could become a series of dominoes. P4- 5 Too big to Fail.