Thursday, November 22, 2007

Next Phase of Money Drying up

Banks feel the pinch as covered bond trading is suspended

Banks won't lend to each other because they worried another one of them is broken. We will be going back to a barter economy soon! One place I read recons this "covered bond market" (anyone understand these?) might be shut till the end of the year. "A key source of liquidity for cash-strapped banks – the covered bond market – appeared to be closed off yesterday after trading between banks in the secondary market was officially suspended and the mortgage bank Abbey was forced to abandon a new issue of bonds."

Posted by happyrenterz @ 11:25 AM (1319 views)
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9 thoughts on “Next Phase of Money Drying up

  • Not a pretty site: The Asset-backed securities index

    http://www.markit.com/information/products/abx/history_graphs.html

    BBB grade down to 15 to 20% of value…

    Explained here:
    http://en.wikipedia.org/wiki/Asset-backed_security

    “In finance, an asset-backed security is a type of bond or note that is based on pools of assets, or collateralized by the cash flows from a specified pool of underlying assets. Assets are pooled to make otherwise minor and uneconomical investments worthwhile, while also reducing risk by diversifying the underlying assets. Securitization makes these assets available for investment to a broader set of investors. These asset pools can be made of any type of receivable from the common, like credit card payments, auto loans, and mortgages, or esoteric cash flows such as aircraft leases, royalty payments and movie revenues. Typically, the securitized assets might be highly illiquid and private in nature.”

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  • george monsoon says:

    Someone must be able to put this into plain English..

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  • tyrellcorporation says:

    …Get James to have a go… he’s a ‘city boy’.

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  • Sorry.
    This is a graph showing that stuff the banks and other institutions invested in and valued themselves is actually worth a lot less than they bought it for. And it is falling fast, particularly since October.
    And there is a lot of it.
    In other words. The banks are taking a multi $100bn bath.

    The interesting thing is that when reporting results. The banks have previously magic’d up a value for these things using “mark to model”. But the auditors want them to “mark to value” for tend of year reporting. So they will have to report mega losses.

    I think !

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  • At least it means there will be no money about to invest in the next Ponzi scheme.

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  • I never realised that pools of collaterised cashflows from uneconomic investments could be worth so much. Oh hang on, they aren’t.

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  • According to http://en.wikipedia.org/wiki/Covered_bonds, a Covered Bond is the same as a CDO except that the liability remains on the bank’s balance sheets. These are popular in Germany and France where the practice of hiding nasties from balance sheets isn’t as widespread as in the US.

    The concern seems to be not that the covered bonds themselves are bad – they are safer than CDOs. Instead the concern is that the same banks which issue these AAA-rated Covered Bonds also have exposure to sub-prime mortgages (either through purchases of CDOs or direct sales of mortgages), thereby putting the banks themselves at higher risk, and thereby threatening the AAA-rating of their Covered Bonds. When the bond rating is at risk, it’s value falls.

    Here’s an interesting related quote from another article:
    “Spreads on triple-A prime UK residential mortgage-backed securities have roughly quintupled from the lows hit in June this year, and are at unprecedented levels. Buyers have shunned the securities as all mortgage-backed debt has suffered from contagion from the U.S. subprime mortgage crisis.”
    Translation: the big money is scared off UK mortgage debt, they expect us to go the same way as the US housing market.

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  • dohousescrashinthewoods says:

    A slightly less accurate, but possibly simpler explanation is that the graph shows “the health of that which controls banks’ lending”.

    Banks can’t “sell debt” because buyers won’t buy it, so the price of debt is falling, just like shares or houses. If the price is falling then the people who already bought some are losing money.

    That’s why a) big banks are writing off billions and b) it’s getting harder to get a mortgage.

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  • To compound the problems mentioned in the article and above, the ratings issued are also under question – for more info go to http://www.moneymarketing.co.uk and under key word search type in The rating game.

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