Monday, 19 November 2007

reading other peoples' papers on the tube

The big headline tonight on the tube (ie what people were reading) was about the £23bn loan that the government has given to Northern Rock out of taxpayers' money. I can't remember how much it equates to per UK adult, but it must be around £1000 per "household".

And at the moment, no-one seems to want to buy Northern Rock, presumably partly influenced by the thought that they would need to pay back the £23bn to the government (aka the taxpayers).

But the UK numbers pale into insignificance compared with the USA, where even the BBC is reporting Wall Street banks could be hit with losses of half a trillion dollars. As a number that's $500,000,000,000, which is quite a lot of wonga.
So with the recent actions by the US Treasury and to a degree by the Bank of England, there seems to have been some emphasis on deferring a crunch-point. But if all of those bundled together parcels of bad lending crash and there's a raft of foreclosures, then the US economy could be in for an amazingly rough time over the next few months, with systemic issues that could take years to resolve.

Mr Northern Rock has gone, so has Mr Citigroup ($11bn) and Mr Merrill Lynch ($8bn). They all presided over organisations which seemed to lend to markets made up of people who represented major credit risks. During the early days of this, many dealers received excellent commissions from this window-dressed business, perhaps with little awareness for the reality of the bad and dis-intermediated bets they were placing.

So if these early estimates of the damage based upon 'fair value' and hedging regulations are indicative, one wonders what will emerge when the spin -laden "Structured Investment Vehicles" finally surface from the hidden areas of the balance sheets. There's a few lumpy carpets in the board-rooms at the moment.

All of this can effect the general bond-market and move the quality of debt question to other 'packages' invented by the financial analysts. No lending, and the wheels of commerce slow down.

So whether the low end figure of $150bn from the Fed or the bleaker view of $450bn from Moody's, theres a lot of money about to go missing. These sub-prime losses, plus the loss of confidence in other loan bundles and the consequent difficulty in borrowing, could teeter the US into a pretty tough recession.

And I wonder who will pay for it all in the end?

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