Wednesday, November 21, 2007

This sounds like a finance industry wheeze (a bit like the super SIV) – Can anyone explain to me what’s happening here?

Europe Suspends Mortgage Bond Trading Between Banks

Are banks taking away their toys until people start to play 'fairly'? European banks agreed to suspend trading in the $2.8 trillion market for mortgage debt known as covered bonds to halt a slump that has closed the region's main source of financing for home lenders.

Posted by tyrellcorporation @ 05:31 PM (1294 views)
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11 thoughts on “This sounds like a finance industry wheeze (a bit like the super SIV) – Can anyone explain to me what’s happening here?

  • What they call ‘selling securities’ sound like they are selling something tangible, but they are in fact loans – they are not selling anything, they are borrowing money. So, far from refusing to sell anything, they are refusing to borrow money. So what we have here appears to be a borrowers strike – they are saying “if anyone tries to lend you money at expensive rates, don’t accept”. Presumably they are hoping that concerted action will persuade lenders to accept lower rates.

    More ominously, they may have one eye on central banks, in effect saying “we are not prepared to borrow at these rates, so either you come in and bail us out at more reasonable rates or we shall ‘do a Northern Rock’ and let’s see what you make of that…” I commented the other day that banks may prefer the ‘moral hazard’ route to sensible banking practice and this suggests that they are signalling that they are prepared to push the regulators on this.

    I should add that I am no expert on banking matters – this is my interpretation of the article.

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  • One way or another, toys or no toys, this will all end badly. There is nowhere left to run to.

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  • This isn’t a wheeze. Covered bonds are at the more safe and sensible end of the banking industry – pools of mortgage and public sector assets which the banks issue bonds secured against – considered by investors as one of the safest bets as you get the credit of the bank itself plus the security on offer. This freeze is a signal of just how bad things are in the market that it has spread to an area like covered bonds.

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  • The Man With No Name says:

    I don’t understand why the BOE would even think of lowering rates – only to keep the housing market afloat. But for how long will this hold?
    It seems that the cost of living, oil, etc are going up and they want to avoid a downturn in the market at any cost. This is going to have a severe impact on the economy for years to come, look at Japan.

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  • I think that the normal liquidity has dried up (HBOS said they were refusing to pay the prices being charged to issue and other’s are suspending their issues due to lack of interested investors) yet between banks they are obliged to quote prices. Without the liqudity the prices are bouncing around between the banks and widening the spreads as each one is obliged to make a market for each other – the mechanics of the dealing framework are obviously no good when there’s little going through the market, so they’ve shut it down before it gets silly.

    “A single sale can be like a hot potato. If repeated, this can lead to an unacceptable spread widening and you end up with an absurd situation.”

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  • I was wondering about the B&B’s recent money raising sale of ‘safe loans’ which they probably would have held onto in preference to their other ‘lower quality’ ones. Are they trying to cover themselves cash wise in the run up to the christmas period or something, are the possibly financially challenged with regard to liquidity; might be worth B&B customers relocating their cash before another run on a bank starts!

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  • the northerner living in oz says:

    I think the best thing to do if you have significant savings is to have several bank accounts
    in different banks

    That way you are less likly to loose everthing.

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  • @5 (The man with no name)

    The bank of england knows that keeping the housing market afloat is not its job, if it tries to keep the housing market afloat it is because we depend upon a gradual house market recession instead of a sudden one. If massive numbers of people default on their loans then massive numbers of houses hit the markets after repossessions, only a small proportion of the money that homeowners have borrowed from *us* the savers then gets back to us and houses go unsold and crime rates rise, etc. The massive reduction in the availability of money /would/ cause deflation except that the banks can’t lose everything and us still be able to do transactions as cheaply as we need, just as we need to to generate wealth – that will oppose deflation to help keep us poor.

    We *must* *not* have a crash with the current record breaking levels of debt and the new found growth of China and India – we need a long slow punishment of reckless debtors and reckless lenders. credit is harder to come by than it has been for a *looong* time – the bank of england should dampen it, *that* is its job.

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  • northerner in oz, not neccesarily, apparently some banks have amalgamated their responsibilities to the FSA cover parent and subsidiary companies. So, if you have deposits in two banks that are owned by the same bigger bank it “may” be the case that only 1 set of deposits are covered, not two.

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