About 8-10 Million homes are sold every year. Assume houses sold in last 3 years have subprime prob which means 30 million total house. About 20% will probably default which means 6 million houses. Avg selling price $350,000/house and assume 20% value is lost which means $70,000/house. This equates to 210 Billion dollar of loss. Tops. C alone has lost $150 B$ of capitalization. I think subprime problem is over blown
David Wessel's recent WSJ column addressed this issue:
"...How could a mortgage-market meltdown -- losses of perhaps $400 billion, less than 2% of the overall value of the stock market -- cause so much of a disturbance and do so much damage to the U.S. economy? "After all," Federal Reserve governor Frederic Mishkin observed last week, "a 2% decline in stock-market prices sometimes happens on a daily basis, and yet leads to hardly a ripple in the U.S. economy."
And is the fire being fanned by the way commercial banks are required to keep their books and decide how much capital to hold as a cushion against bad times?
The short answer to the first question is leverage. The short answer to the second is yes.
What role do you think leverage and the way banks decide how much capital to hold played in creating the current credit mess? Readers, weigh in.Leverage is borrowing money to make bigger bets. Invest $1, borrow $9, buy something for $10. If its value rises $2, you've tripled your initial investment. It works great when the market is on the way up. On the way down, it amplifies losses.
Banks are highly leveraged. That's how they make money. Peter Fisher of money manager BlackRock recalls giving a talk to a bunch of bankers and asking rhetorically: "What's the difference between a hedge fund and a bank?" Before he could answer, someone in the audience said, "Banks are more highly leveraged."
A bank has a set amount of capital. Based on regulatory rules and management's judgment, it borrows some multiple of that sum, either in the markets or by taking money from depositors. It puts that money into loans or securities, its assets.
Banks today find their assets worth less than anticipated, the consequence of a real-estate bust and falling market prices of securities. These losses erode a bank's capital cushion. With less capital, banks shrink their balance sheets; they lend less.
How much less? That's where leverage comes in.
Say for every $1 less in capital, a bank lends roughly $10 less. At a conference last week, sponsored by the Brandeis University and University of Chicago business schools, two Wall Street economists and two academics estimated that about half the mortgage losses, or about $200 billion, will be borne by banks and other leveraged financial institutions. That will lead them to shrink their balance sheets by about $2 trillion by lending less and selling assets..."
I understand the leverage part. Thats why banks r down so much. Here is another food for thought. 30 million houses that were sold in last three years were overpriced by say 20%. Well, then 30 million household are 20% richer than the rest. 30 million house hold is 120 million population. So, half the country is richer than what they otherwise would be if they did not sell these houses. It is a zero sum game - cant be all that bad.
What kind of dope are you smoking today?
First of all, it's not just a "sub-prime" problem. It's a real estate bubble problem. Secondly, the housing ATM is closed and many many good jobs have been shipped overseas. Consumers are tapped out. Third, those that still have jobs cannot afford to pay delusional prices when buying property. Hence, a nationwide fall in real estate prices. The banks are on the hook big time, and the federal reserve is wasting billions and billions of taxpayer dollars bailing out their buddies on Wall Street. In the process, they are manufacturing inflation and stealing the savings of millions.
If I were you I'd be looking for $6 gas, $6 loaves of bread, and higher prices for many other items. Kiss your ass goodbye. Have you ever been in a soup line?
correction again. Avg selling price will be close to 250,000 not 350,000; hence loss/house is $50,000/house. which translates total loss od $300 billion dollar. Market cap loss of C, LEH, GS, MER FRE FNM BSC is over $350 B$. I think this is OVERBLOWN. Remember - subprime losses have been distributed to the world not just 7 institutions.
Sir - you are describing a simplistic zero order differential effect on the economy. Your reasoning might make sense in test tube isolation. Unfortunately, there are huge volumes of "cash" commitments tied up in an amazing number of bizarre leveraged derivative instruments. $300 - $400 Billion is responsible for over $1T in differential products - the number and variety exposed grows every day. Not to mention the higher order multipliers involving retail sales and services to home owners, factory orders, food, commodities, futures markets, foreign debt servicing, etc.
No - this is not overblown. I can hardly wait for my $200 check from the great bush. It will be nice to finally have a full tank of gas with some left over for a gallon of milk, load of bread and a dozen eggs.
As the great GW Bush said - "core inflation is low, except for food and energy...". Ahahahahahahahahah - he should have paid more attention in his economics 101 class. I guess he was too busy cheer leading!
What a Putz.