大象传媒

Yes, the worst is yet to come. The dollar is falling, the housing market in the US is DEAD, jobs are being formed here but they are poor paying jobs with no benefits - meanwhile all the factories are blackmailing their employees to take major cuts in pay and benefits or they will move to Mexico or China. Employers take courses on how to hire foreigners at (on average) 30% less pay than they would have to offer US citizens - and this is a problem for folks with Master's Degrees and PhD.s as well. Their income has actually not gone up and in some cases gone down in the past 5 years. The feds cannot raise the interest rate to prop up the dollar because the housing market would surely BURST all over the place. They are walking a tightrope of their own making and it's only a matter of time. If China, who holds trillions of US dollar investments, suddenly decide to play hardball, the whole of the West will suffer. Good time to put your funds in SAFE places....

The "American Dream" has been set for a cave in for a long time thanks to over-inflated housing prices, the disappearance of rental housing, and regulatory complacency by the Fed Chairman, who is more concerned about inflation.

Sub-prime lenders have bombarded low income consumers with too-good-to-be-true teaser rates, and they have been aided and abetted by a culture that dictates home ownership above all else. Watching the adverts is enough to make one's skin crawl, for those who know the light at the end of the tunnel IS that of an oncoming train.

At the top end, real estate speculators have been gobbling up housing for a quick profit, and quite rightly, they are suffering as well.

This is how the Great Depression began, it is not unreasonable to believe that a segment of the American population will be experiencing the modern version of what their grandparents went through in the 30's.

Memories are short, and history is doomed to repeat itself.

In simple terms its the way all big business's make money.
By a new fruad.

Till the time it comes to light these few big people have made their money, stitched the common man and Wallah Disappeared.

Same as US growth, UK growth can be defined as "Overpriced Valuation". There has been no organic growth of business. Growth has only been by M&A.

Finally, I would really like to ask would any heads roll when all comes out. You know my answer which is most probably yours

NO.

ive just an article on the 大象传媒 website just now that states that 49 financial institutions have taken out loans from the ECB's 95 billion emergency euro injection announced today.

excuse my hopeless ignorance on this- but does this mean these 49 institutions have the same problem as BNP paribas?

All of this has been apparent for sometime to those brought up on sound financial basics. The US markets and all that goes with them are based on debt and we are about to witness the crunch. Wither the US goes UK and much of the rest, except Germany which has sounder financial values. Gordon Brown and his Prudence will also be shown to be bullshit. Can we have our Gold back please Prime Minister, and at the rate you sold it.!!!

It goes to show just how many of these "smart" people are just plain old fashioned gullible fools.

'CDO squared'. What a ridiculous concept - the sheer silliness of it should warn anyone to steer clear.

Finally somebody said it! There is much more to come. Let鈥檚 talk about US consumer debt, US corporate debt etc. The US economy is based on creation of a new debt. Without it there is much less of economy than anybody could imagine. Most people did not want to admit it but earlier or later this debt "bubble" will burst and the US global position will change and Anglo-Saxon economic model with it.

Yes, but, the magnitude of this sorry mess is still insufficient to derail the world's economy, or send us into recession. A market decline, not an economic crash. The "I'm smarter than you fellows", the ones with enough net worth to invest in hedge funds, will be gored, and the wealth will be redistributed to the "I'm actually smarter or luckier". The drop in liquidity, especially to the opaque hedge funds that account for an absurd amount of daily trading, will create a buying opportunity to fundamental value investors.

Crumbs - perhaps we should get on the Financial Noah's Ark - before the deluge starts. That's of course if you have built one!

The signs are ominous for us all in the Western World, and I fear that every Joe Public in the UK is going to pay a very heavy price for the next 30 years for all of today's short termism.

Put simply

Commodity Prices - rising as demand fuelled by Asia grows rapidly
Banking Liquidity - shrinking as lenders get the jitters. There is only so much "support" the ECB can offer to bolster the entire system
Interest Rates - rising everywhere except the US. They are looking to shrink their rates. Remember what happened in Japan in the early 90's when this happened - stagflation - it looms high on the horizon again
Consumer confidence - fragile now and this will weaken as interest rates rise, especially in "heavily indebted economies" like the UK
Sino - American shift - if the Chinese sell US T-Bonds en masse, the world will shift into major economic reverse. They hold nearly 1 trillion US$ of US T-Bonds. Artifically pegging the Yuan to the US$ delays the evil day. When China shifts enough exports within the Asian region, watch the shift. It is not as far away as we all think over here.
Demography - 10 year Census models are redundant in today's digital world. The UK Government uses the Census for fiscal planning. Our EU membership and mobility of labour makes a total mockery of this. The balance of risk and reward is wrong. UK citizens take and pay for the risk and non UK citizens appear to get the rewards. There are now real and severe geo-political risks for every developed nation as the risks of protectionism increase. What price federalism today? Hmmm!

Who pays. We all do, in more tax (direct and indirect) on everything we consume. Our pension pots will shrink, unless we invest in defensives like gold and cash now. Our houses will soon no longer provide "equity release" to sustain consumer demand. We will all feel poorer, and perhaps for the first time since WW2, we really have to learn the art of thirft.

Time to pay off the debt, cut back on the luxuries, escape equities in favour of the simpler assets like cash and rising commodities - gold, oil, water and agriculture (linked to biofuels) and get your hard hats on on top of the wellies and waterproofs. This will be a hell of a choppy ocean ride.

Excellent comments. I agree with his dire predictions, and expect much more "subprime poison" spreading all over. I don't believe UK will stay immune.
For me the subprime poison is but one example of the faulty Anglo-American model, based on unabashed grid (in their mindless "pursuit of happiness").
The Europeans are right to reject it altogether in words and deeds.

Calm down, folks! The central banks can provide an infinite amount of liquidity- they can print as much money as they wish.

All that's happening is that the easy money is reducing as the bank rates are moving up to more realistic levels. Therefore cheaper credit will be available only to those who are more creditworthy (rather than to all and sundry). Some speculators who are highly leveraged will lose out, but that's OK- it's normal. The market will return to more realistic valuations and all will be well again.

The USA has no true Central Bank; The New York Branch; of the USA Federal Reserve; sets US Interest Rates. Its board is made up of the representatives of three Banks, J. P. Morgan Chase + two very small banks, 1 from New Jersey, 1 from upstate New York; these 2 banks will do whatever Chase asks. The controlling stockholder of J. P. Morgan Chase, thus sets USA interest rates; his position is derived from the controlling stockholder of the Rockefeller Fortune; his name is David Rockefeller. His predecessor and grandfather, John D. Rockefeller Sr.'s decisions sent the USA, and the world, into the Great Depression of the 1930's! In 1896, The Standard Oil Trust's President was sentenced to two years in Sing Sing Prison for dynamiting a competitor's Oil Refinery, while John D. Rockefeller Sr., was its Chairman of the Board!

How can the world avoid being sent into another Great Depression, much worse than the 1930's Original? The USA must replace the Federal Reserve with a True Central Bank! English nations must break up the Re-Assembled Secret Offshore Standard Oil Trust, consisting of J. P. Morgan Chase, Citi-Group, Exxon Mobile, Chevron Texaco, Royal Dutch Shell, British Petroleum, and the Saudi Royal Family. They must mandate the Two Controlled Combustion Cycles, The Texaco Gasoline and The Mann Diesel, which wil cut crude oil consumption for automotive engines in half! Then both nations must adopt Silver, perhaps include a market basket of other valuable metals, as the basis for their currency, and seize the four big international oil companies. Both governments must finance all political campaigns, and perhaps dissolve all political parties.!.

What a surprise!!!!

All informed comment has been saying for ages that these credit derivitives have no base and were a catastrophe waiting to happen.

I have worked in the credit market (not deritivities) for 40 years. Credit is a promise to pay and when you offer this to criminals and those with an inability to pay you seek problems.

When you then roll this up into an opaque package and sell it on you compound the problem. I find if hard to accept this as a legitimate practise. How can you chase down each component of the package to honour their obligations?

I have to say that when "clever" financial engineers take a simple product or concept and complicate it, then probably the result will end in tears. In this case it certainly will but by then the "clever" ones will be well away with their bonuses banked and they will be working on the next scam.

If the majority of the financial world is happy to be taken in by snake-oil salesmen, then maybe the only answer is to ban snake-oil.

The Fed appears to be between the proverbial rock and hard place.

On one side is the not insignificant national debt of some $8,500,000,000,000 (yes, that's a lot of noughts). Each maturing bond can only be paid off by issuing another bond, so the Fed has to offer whatever interest rate it takes to encourage buyers to take the new bonds. Otherwise it's all over. The way to encourage buyers to take your bonds is to pay higher interest rates.

On the other side is the collapsing housing market, starting with the subprime areas and spreading to infect the housing market as a whole. As subprime mortgages default the market is hit with a wave of property for sale, which reduces the value assigned to remaining property, which removes the "wealth effect" of people remortgaging to release equity to spend. So consumer spending slows, which ultimately causes a recession. Raising rates further hammers the people who took out ARMs and makes housing less affordable, exacerbating the situation.

Problem 1 requires interest rates to go up. Problem 2 requires interest rates to come down.

If rates rise the housing market collapses and the US plunges into recession. If rates fall the dollar is toast, imports become more and more expensive and the US plunges into recession.

Whatever happens it's going to get ugly.

It might be a good time to rent and find a safer way to invest your wealth/savings/equity. Gold. Besides, you rent you have less taxes.

'US Exports Posion':I found this banner line pretty offensive.
Nobody asked Paribas to set up in subprime and expose themselves to risk. Too bad they were not suave enough.

Actually Mike, Japan suffered stagdeflation as they could not stimulate the economy to produce any measurable growth and thus inflation. It was however also based around a property bubble, which collapsed taking at least two major lending institutions with it.

However, Robert, no-one should get too cocky about the sufferings of our continental chums: "The incongruity is that the Anglo-American model of financial markets is despised in many European capitals; it is droll that their banks were seduced by Wall Street.".

It should be mentioned that Barclays (hoping to buy European bank, ABN) has already taken a bath of at least 拢200m (or maybe as much of 拢500m) on the two Bear Sterns hedge funds, which collapsed to "worthless" on the back of bad sub-prime debt.

Ironically enough, I have had employment dealings with UK bits of BNP and Barclays recently - it came as no surprise that all their terribly "experienced" staff never saw this lot coming. Apparently, I wasn't experienced enough in either case, but having a world-class MBA, I don't own "junk". Mind you, the finance course looked at valuations too and proved in 2001 that Internet dot.bombs were "junk" too. What do I know - the problem however is that these "experienced" folk will cover themselves and someone else will take the pain of their incompetence.

Mike Deacon - Yep you got it in one..Short Termism... The real British Disease.

Don't worry abbout China getting rich while we decline, The Chinese economic miracle depends on one thing - US & European consumers to buy their products. If we collapse then they collapse also, but hey it was good while it lasted and 60-100 million got seriously rich on the backs of the slave labour that was required for us to get t shirts at 70p. America has a serious problem and they are hiding it, you must be crazy if you think that only European and Asian financial institutions are going to get caught out by the financial snake oil of credit derivatives! if you think todays sell off was bad, wait until JP Morgan or Citibanks freezes withdrawals at one of their funds. The continuing misery in Japan is not relevant, The Japanese markets declined 75% not 7% from their all time high, but Japan was the richest country in the world. The US is dependant on foreign investment and is bleeding money, not least on a war it cannot win.

For my Brit mates across the pond - it's called The American Dream because you have to be asleep to believe it.

This all comes back to a few selling the majority something they either a) don't understand, or b) won't take the time to understand.

However, there is hope for the investor. As everyobody knows the best time to be buying is when everybody else is panic-selling. Hold your funds for the next 3-12 months and unleash your warchest when the bargains begin to appear.

It's a shame that it's the banks being bailed out rather than those people losing their homes, for whom the central banks money could have been used to restructure their debt or suspend their mortgage payments for a couple of months.

What are the odds the banks will cut back on their corporate jamborees and other spending as a result ?

Today it is all about money and it is short term, so no one looks at long term and tries resolve the problem. The other problem we face is the political will, each one wants to out do the other, this is all about it.
It is a global problem and not an isolated, as today economies are much more dependent than it was ealier. If all key countries (political persons) along with key regulators are focused without trying to out do the others, the issue should be overcome atleast in the next year or so, else we would see this happening in other economies like in China, India and few other emerging economies. I hope some sensible people with right authority come together and address this issue before it starts hitting other areas and other economies.

All of these products were rated triple-A by 'independent' rating agencies who were paid by the issuing banks to rate them.
Wait till they start trying to value some of the other so called triple-A bonds that the investment banks have sold, particularly the BRIC (Brazil,Russia,India,China) market debt, then you will see some problems in establishing what they are worth.

Nice call again. Read your column, shorted the FTSE 100 last night, and another couple of TV licenses paid for this morning.

Very good point Toni. It's all very well to have a little dig at the "continentals" but the solids have the potential to really hit the punkha not in Europe but in the US. If the big boys over there (and, perhaps, in the UK - what is HSBC's exposure I wonder?)decide that they cannot value their assets in the same way as BNP then the exposure of European banks will pale in comparison.

The economies of Europe have their faults - plenty of them - but at least they are not built on unsustainable levels of consummer credit. That might just be their salvation.

Is it the case then that the banks have lent money to the poor, at high interest rates, in order to accommodate the rich investors hedge fund?
Is it also the case that the rise in the market has been nothing to do with intrinsic worth, but mere tak-over speculation driving up values, so when the source of cheap money to fund this,(the poor), dries up, down comes the house? The rich can afford their stupidity and greed but the poor can't.
And as for the comment about gold-precisely what would you do with it? Sitting in a vault you can't spend it, eat it or invest it. To do that, surely you have to sell it to raise cash, or pledge it to borrow cash. Large gold reserves seem to me to be as much use as Midas' was to him

On the bright side, a French investment banker believes that his primary job function is to protect his own back, and he will say or do just about anything to fulfil that function. After all, most of his customers are foreigners, and the French government are never going to let them sue him for making false or misleading statements, are they?

Because of this, I would only believe a statement made by BNP if it was corroborated by someone else, not French.

Learning that little lesson cost me 2m Euros. I pass it on for free....

Two key points I noticed this week- ECB pumping 60bn into the banks in a pre-emptive strike. (It's very rare that we see an intervention move of this kind, so all this talk of subprime bottoms may not be so accurate).
and also George W Bush coming out and allaying fears about the u.s economy and stocks haha!! In his entire term, I don't remember Dubya even recognising the stock market but now he's telling the world to get in (i'd take profits on that alone on that alone).

Not so long ago Axa insurance wrote to bond-holders advising that they were going to invest funds in 'securitisation'. So I wonder just how many composite insurers became the mugs of last resort in buying sub-prime rubbish? The principle of rolling up CDOs sounds alarmingly like the Lloyd's insurance spiral of the 1980s, where syndicates happily reinsured each other's losses.

Look I am no expert, not even a lay person of any sort when it comes to the stock markets... but... just look at the DOW average, 12 months ago it was 11000 odd, now 13000 and has been to 14000 odd, thats 18% to 27% higher than a year ago.
Doesnt the index indicate value of the blue chips? Could they have increased their value by 18% to 30% over a year with the whole economy growth at under 4% or is it 3%?

Seems not to me or am I missing something.

The UK also has a massive sub-prime market - it's called self-certified mortgages.
And what about interest-only mortgages sold without any checks as to how the principal is to be repaid?
I find Peston's complacency staggering. With over 拢1,3 billion of personal debt, The British are by far the most indebted people in Europe. With 2 million mortages due to reset in the next 18 months, I'm afraid it's only a matter of time before the UK housing market crashes. It's already started in some urban areas where speculative BTL investors are having to subsidise their tenants. When they realise that there is no prospect of capital gains, we'll see the all pack of cards collapse !!

This is wonderful news - it is about time that investors learned that there is no such thing as a one-way bet, and that a more cautious, risk-savvy approach is called for.

If some of these rapacious hedge funds are put out of business and a few greedy fingers are burned, it can't come some enough in my opinion. A wider recession / depression may be unwelcome, but the continued expansion of the economy has painful consequences for the environment - and this 'live now, pay never' nonsense has to stop sometime.

Just commenting on one aspect of the blog/article above and that being the alleged terrifying fact that BNP won't buy the assets at a market value in order to provide liquidity. I am not sure that I see it that way. First of all one has to realise the desk that runs the investment manager function for the funds is unlikely to be the desk that runs the trading desk of BNP that would deal directly in the market. Secondly against the background one has to look at the inherent conflicts between BNP as investment manager (acting for fundholders) and BNP as trading bank (acting to maximis profits for its shareholders)in the situation and the fact is that normally to manage those conflicts one has to behave in an arms length manner. If there is no liquidity it is very difficult (beyond using their own internal models - being the internal models that are being criticised for not having accurately predicted the crunch and one of a number of models producing significantly different valuations across the market) to come up with values that represent a fair market value that nobody can argue with.
Consider the buying desk at BNP looking at it from an arms length point of view. They would, I imagine say it is a buyers market and since nobody else is buying (and taking into account there is no common market price due the turmoil) that the price they are willing to buy at is going to be unsurprisingly quite low. Now imagine that all this turmoil turns out to be a correction or temporary and the market bounces back from being oversold etc. No doubt at that point you will have fund holders rather unhappy that BNP seem to have made money from this turmoil and their pain (with the associated reputational risks not to mention the difficulties in defending any legal action due to the lack of clarity on the pricing with the chance). The alternative is that BNP in practice buys at an above market price to insulate from the rebound chance but in practice this still creates worrying precedents if they choose not to do this on future occasions and just transfers the risks/losses to its shareholders as well as representing bad business sense and not really be an arms length decision.
I haven't looked at the fund offering documents but I would suspect that the ability of directors to suspend redemptions in the case of a lack of liquidity is quite clearly in there so fundholders should have taken that into consideration when purchasing the fund. Of course suspension can be a big deal where it is desparate attempt to stay afloat and trap people in the fund but in practice it can be directors of the fund excercising their judgement with the investment manager that the market conditions are such that assets can, in the current environment, only be liquidated at distressed levels which is not advantageous either for those seeking to get out or those who want to remain in the fund and ride it out (since the assets liquidated won't be necessarily prorated over all of the holding but will be those that can be most readily sold whether or not they represent a good longer term investment).

Fundamentally the argument that BNP won't take the long term view is a suggestion that in the long term they would make money out of buying them now which in turn implies that they can get them cheaper than otherwise which in turn comes with all sorts of associated risks. I am not saying that the suspension does not carry assoicated reputational and legal risks but there is a tricky balancing act in there and so I am not sure it possible to draw such strong conclusions from it.

You have just frightened me to death.
I am very low down on the food chain, in fact extremely low. Nonetheless we are all, I fear, in for a rude awakening.Malcontents and ill wishers will take heart, and give life to their long pent up furies.

Great News

We all know that credit has never been more easily available and only for the backup of rising house prices has the UK public been able to finance this debt. At last the UK financial institutions will hold back on the buy now pay later model. People will be required to re-evaluate their finances and reign in their spending. Interest rates will help the desired effect of reducing inflation and one or two years down the line we will be back on the straight and narrow.
The British public will return to the equities investment market and this will help the funding of company spending, generate more jobs and back to normality. The US subprime concerns are an early warning with excellent timing to help the UK financial sector change its course.

We all new it couldn't last forever.

Quelle surprise!

And it's no surprise to see the conspiracy theorists coming out of the woodwork on this too (*ahem*Xeno*ahem*).

The US market is teetering on the edge, and it remains to be seen if the Fed can walk the tight-rope well enough not to cause a melt-down either way.

Either way, the British public should prepare itself for increases in interest rates other credit squeezes. Credit card tarts will have one hell of a time trying to find their next card to tart themselves to. Better realise now that it's best to pay what you owe (and you will have to eventually) than eventually being forced to.

The housing market won't be as liquid either as it is now (regardless of whether people can afford to or not, they still try to get onto the housing ladder - I've given up because the sums don't add up for me).

As Mike Deacon pointed out, it's time to realise that financial austerity and thrift will be the only thing that will help us now. No need for the new 40" plasma TV when the 32" still works, no need for a new Mercedes when the old Focus still does the trick. Yes, this will have a knock-on effect all over. And it will hurt some more than others.

Is the US really that different to the UK. I would expect the crisis to start over here soon. We already have higher interest rates and house prices are now approx static, how soon before house prices really start to fall. Then we have lot's of negative equity and reposessions, amounts to the same thing as in the states. Hold on to your hats

SO the world's market is in turmoil; who cares?

I see no reason why the central bank of each country is bailing out these 'irrational and irresponsible lenders called banks'. If they do the crime they must be prepared to do the time as well.

One thing we must not forget is that the basic fundamentals when missing will always rear its 'beautiful head' when things go awfully wrong as in the case of the sub-prime market. Take note greedy investors and banks

what is that famous saying "what goes around comes around" for too long americans have been geady and that the rest of the world has had to suffer, now they waste money on wars they cant win and buying off goverbments so thhat they can control the world. The time has come for the americans to enjoy a bit of their on medicine.

Why is everyone so surprised? The Billionaire aristocracy have been selling junk debt to poor suckers since cowrie shells were seen as a great hedge. All that is happening is that the poor have got too rich and yet again time has come for a fair distribution back to the mega rich. (Isn't it about time we had a new superlative ? "mega" just doesn't sound big enough any more.)

In the last ten years it's happened with dot.com, the Asian market crash and Enron etc etc.... This spat will just be another little inconvenience we need to put up with to maintain the lifestyle of our masters.

The level of debt in both the USA and in U.K. is unsustainable. Growth bases in consummer spending (largely on credit) an house prices rather than productive investment is just set to vanish like mist when the sun comes out. Remember the South Sea bubble and railway shares in 19th century Britain. Also that a house only has value at the point of sale, at all other times it is an expense like any other form of plant.

I have no experience in finance and world economics, I'm just Joe Public as far as this is concerned. But as an impartial observer I find it horrifying that my life is likely to be turned upside down but uncontrolled, non-regulated high level scams and greed. It begs the question, whats the point in voting for governments when they are, at least, helpless, at worst, compliant in robbing their citizens to feed corporate greed. These articles illustrate quite clearly who runs the Western world, and it's not the people you vote for.

What's a greenback? I suspect it is a measure of trust in America. And that, we no longer have cartloads of. Suggestion: Yankee, take your troops and go home. Then work out another movie. Like the Marshall Plan, the one that got the world to trust the greenback last time round. C'mon, you can do it. We don't hate you, but unless you come to terms with international decency, the rest of us will re-form the world exonomy without you.

The financial markets have been propped up for too long by the lies and deceit of Wall Street banks, and the financial media. The day of reckoning is now at hand as the following words from the book of Proverbs make all too clear:

"The integrity of the upright shall guide them, but the perverseness of transgressors shall destroy them."

Proverbs 11:3

I see, yet again, lets have a go at the Germans and the French. Yawn!

When will the world realsie that the guys at the top who pull the strings are only interested in dollars and they don't care how many people they hurt. They are all in it - the FED, the bankers, the investment industry the government for allowing all this. All they care about is the distribution of wealth from the many to the few! I wouldn't be surprised if our pension funds are holding a fair amount of these dodgy CDO's. Wake up and get informed.

what an overblown rhetorical style you have, far too many cliches and metaphors - get a grip man!

We may not like the Americans for many things but they have been innovative in financial markets by introducing derivitives that make the dollar go a lot further. Teh problem is the level of understanding of some of these products is now needed to be so high that most fund managers have no concept of what they are looking at and how to unwind what is already too complex , let alone hedge against it.
The result the term free markets needs reimterpretation. Warren Buffet has made several down to earth sugestions on what to avoid and was laughed out of court. Perhaps we shoudl restrain the overpaid geeks and ensure that any new financial derivitive is guaranteed by the banks that issue it. When historic banking principles come into play the world will not shrink or enter years of depression, al that will happen is that we revert to appreciating real live value not some intrinsic trumped up hybrid variant generated solely for the purpose of commission to the investment banks!

The american banking industry has many
levels the smaller players are toast
however the higher you go JP Morgan
Bear Stearns etc. The more Pseudo govt
depts they become. The Us govt will not let the big boys fall as their experience enable the Us govt to manipulate world stock markets.(NB Economics is warfare and vice versa)

I along with many others were partly successfull in shorting smaller sub prime lenders six months ago. It became
clear to me they were proping each other up by not only upgrades but buying loans
and offering credit lines.

I would suggest reading first "Fooled by Randomness" by Nassim Taleb before investing.

Ah wonderful. So what you're saying is that when the economy finally goes *phut* as a result of Brown's 10 years of mismanagement he'll be able to shrug it off as due to "world economic conditions" rather than his own overtaxation and overregulation. The teflon chancellor indeed.

Don't worry voters; New Labour knows what it is doing?

After all they let the electorate borrow 1.4 trillion secured mostly on property values whilst at the same time reducing government borrowing. So if things do go wrong the government is in a good position to prop up UK Banks allowing lending to continue.

Germanys IKB Deutsche Industriebank on the other hand is into 拢12 billion of exposure to high-risk sub-prime mortgages in the United States and is one of 49 European Banks that the ECB has propped up.

The new economics is debt and it underpins global currencies. It has become a natural cycle of buy and sell in the markets. Worldwide bourses have automatic clamps that come into play preventing a destructive sell off; such has been the case recently.

Our only worry should be that Gordon Browns taxpayer funded Parliamentary pension of around six million pounds does not suffer because of stock market turbulence. The best thing that could happen to him is to suffer political misfortune meaning he loses the next general election and has to retire.

I don't think this problem is a sub-prime issue, the housing crisis in America, (and the forthcoming one in the UK), is a symptom of the financial engineering that was created to manufacture yield during a period of extended low interest rates. The central bankers of the world lied about inflation, (sure dvd players made in China are cheap but so what), and wages have been kept low as a result. In order to keep the consumer driven economies buzzing people have been encouraged to secure lending on their only real asset. Now that the financial institutions are frozen by the realisation that they do not know how much of the dodgy miricale paper is out there and who is holding it, they are bleating for the central banks to cut rates. That is a poor solution and will do nothing to remove the cancer hidden in the system. The CDO's and other asset backed notes recieved the high ratings because of the level of over-collateralisation, which should have protected them in the event of a downturn. The problem was these assets were designed to sit in a fund for 10 years paying out a coupon without ever being marked to market. Due to the greed of the players it is likely that the structured paper was used as collateral for further investments in more structured paper, a recipie for disaster as anyone who was financing holdings in Russian bonds with russian securities in 98 knows. As the paper was held as collateral it had to be marked to market by the lender. If you recall it was Merrill Lynch who kicked off the Bear Stearns hedge fund problem by siezing the collateral they had posted with them, after they tried to sell that collateral they realised that they would have to book a huge loss and they must have also started considering the value of their own holdings in structured notes. The highly leveraged Bear Stearns fund, you may recall,had recieved additional leverage in the form of $400m financing by Barclays, so I await a statement from those guys soon.

Well this will spiral and potentially millions of households in the US and the UK will find their overpriced homes in negative equity for many years to come. Interest rates will rise for sometime yet forcing many to default. But the good news is that many of us will be able to afford homes, our savings will rise, banks will lend to only the most sensible of us. No more or fewer leverage buyouts. Maybe people will learn from this experiance.

This has been a long time coming. People are finally starting to wake up to this but it will be too late. I know quite a few people who work in the subprime market in the states.

The standard practice at most of these mortgage companies is to forge peoples' tax statements to make them look like better applicants, which allows the companies to offer them lower interest rates. The applicants have no clue the loan officers are doing this, they just think they are getting a good deal.

A company (or employee) that doesn't resort to this won't last long since they won't get any business since they won't be able to offer good rates.

Yes the US exported it's poison and debt problesm to other countries, but notice how it's the other countries that are going to pay for it. Yes the US has it's problems, but to the disappointment to Post WWII jealous Europeans, we'll be just fine. It's really pretty fascinating how the US is making others pick up the tab.

~ A proud US Citizen.

Although I have very little knowledge of the ins & outs - surely money doesn't just dissipate?

My theory.
The bank doesn't get the money back from the subprime borrower (that's the risks i guess!). However the money is still in circulation with the person who sold the house. The repo'd house gets sold (still an asset although of lesser value) and so the bank gets a little less money back than they lent. Whilst the original seller puts his money back in the bank (or buys another property and the cycle continues).

So why does 拢100-拢50 = 拢0?
The short price recovered is still of value - no?

All this talk of gloom and depression - somebody is making money somewhere (as ever)?

Maybe we should all start buying repo'd property to rent out?

Capitalism.

Who would have thought that lending money to people with no hope of ever paying it back would have led to such problems? Life if full of surprises. And yes, things will get worse. The problem will not be "contained within the subprime market" as many hope - this is plain enough when one considers that when calls are made upon the "collateral" backing these securities - it will turn out to be worth only a fraction of what it was valued at. There will be a realisation that Prime CDO's are similarly overvalued and even though the default risk is less, the confidence in such bonds will vanish. Banks and institutions will be left with near worthless bits of paper - by the time they realise they have been had, it will be far to late.

As for the central banks, they are doing what they do best - rolling the printing presses to create new currency; effectively destroying the value of their own currencies to frantically stave off a recession.

All of the so called prosperity over the last few years has been a phoney credit boon; now the credit has run out and payback time looms.

As an ordinary private investor, at times like this, I am always being told by the "experts" not to panic and that I should understand that stocks should be viewed as a long term investment. How come that the very same experts are the first to panic sendind the markets crashing worldwide? Most seem to be wide-boys in it to make a fast buck and to hell with the long term.

Someone once said cash is king, we may receive confirmation shortly this was correct. You cannot eat bricks.

I'm reminded of the film "Pretty Woman". Julia Roberts can't understand how Richard Gere makes so much money just by moving money around and never actually making anything. She feels that it's just wrong.

I wonder if Julia Roberts was right? I can't pretend to understand the financial markets well enough to express an opinion either way, but it does seem to me that an awful lot of people expect to make money just by moving money around without actually generating anything new. Could it be that they are now discovering the hard way that that is just not sustainable?

I am not worried about banks / investors loosing money, because they didn't assess the risk properly therefore they are paying the price now. But, what I am worried about is where did the borrowed money go? It could be a deliberate attempt by fraudsters ( or even Terrorists) who might be using this money on dangerous activities.

Xeno7777

What is the "Mann diesel controlled combustion cycle"? Some googling reveals one or two papers about the Texaco CCC that you mention:%3Ca%20href="https://www.sae.org/technical/papers/720051" rel="nofollow">https://www.sae.org/technical/papers/720051
but I can't find anything about the diesel ones except your copy and paste posts in other fora.

All the comments above seen to have it the wrong way arround. The winners are those at the bottom who have spent money that they will never pay back, the losers are those who have lost some of their savings. If it turns out that the banks have lent us all money more cheaply than the underlying risk would dictate then we have all benefited at the expense of the banks shareholders.

It is interesting to read that the US FED chairman is willing to let the speculators twist in the wind and refuse to cut interest rates. Many look at this turmoil with more curiosity than fear since we have done boring things like save a portion of our income at a steady pace and invest in companies that do not carry a lot of debt.
So here we sit with some cash in our pockets, weathering another downturn in the markets. There are quality investment products available at favorable pricing now. It will get better shortly.
The only ones screaming about this are investors looking to blame someone for their bad investment decision.
Our markets open in a bit and like everyone else I hope they tick up a bit so we can enjoy the weekend.

That article just proves that anyone can be an expert afer the event.

Care to comment on something that will happen in the future maybe?

Hi

Just a quick question for all you experts.

Why are companies that are in a similar business allowed to buy shares in other companies engaging in the same businesses as them ? For example airlines buy shares in rival airlines , car manufactures buy shares in other car manufacturers .

It seems to me that this is anti competition . Surely this should be looked at before implementing SOX.

Unimpressed by world finance .

So where were all the clever pundits in the MSM when these funds were going gangbusters?

Having been looked upon as a dinosaur for saying for years that the UK economy is based on froth, this gives me some grim pleasure.

I wrote the the Sec of State for Industry a while back asking her to explain (i) what was driving our economy, apart from borrowing based on telling each others our houses were worth more and the one-off benefits of cheaper credit (which stops once interest cover is returned to maximum tolerable levels, but sets it all up for a fall), and (ii) what we would do to create wealth once all we did as a country was sell insurance and coffee to each other. I got some trivial bullshit back about having "created" loads of new jobs since 1997 (she didn't mention they were mostly involved not in creating wealth but rather spending it) and the puerile comment that China would operate in low value sectors. I wondered whether this lady knew anything about running a business, until I realised that in fact she didn't.

The West has run on puffery and debt for years. The fundamentals are that we don't trade goods any more, and the financial institutions have no lasting value as they could, and probably will, be based on the Moon soon for all they care about being national institutions. Until we realise we are competitors with China, Mexico, Korea, India etc and unless we can trade toe to toe with them we are finished, we will dig the hole deeper.

I have to say it's rich to hear this stuff from Mr Preston. He, along with the rest of his profession, has shown no more insight that the politicians. I've read enough idolisation of Gordon Brown from Mr Preston to last a long time. That he is a journalist who can change horses when the truth slaps him in the face is nor more of a surprise than the rest of it. Believe it or not, but there really are people out here who can see the crash coming and have done so for a number of years. It's about the basics, and they are rubbish right now.

A return to fundamental truths hasn't arrived yet, but it's coming. And God help us all when it does.

This are some of the consequences of unbridled liberalization,where the fate of all and sundry is determined by a few irresponsible people calling themselves guardians of the free market system.This trend clearly demonstrate that there is no free market any where and this hijackers of the market must be made to understand that they cannot always have their way.

Sorry, but get over it, for one simple reason...
THERE'S A WAR GOING ON!!!
Hundreds of thousands of Iraqi civilians are being killed; thousands of US and UK service troops are being killed, all at a cost of BILLIONS of dollars. If the US government wasn't so mired in the Iraq mess, they might actually be able to offer some real help (like cutting interest rates, or bailing out the sub-prime market victims). At the very least, the court system should be concentrating on bringing these shady lenders to justice, instead of trying to figure out ways to avoid Alberto Gonzalez, GWB and Cheney from being impeached.

This is disgusting. Fat cats playing poker with other people's money, getting richer off the back of hard working people through spurious financial practices, and leaving us to suffer the consequences.

Governments must give us much greater protection from the excesses of unrestrained capitalism.

Two comments:
First, it would be a FRENCH bank that says it can't deal on both sides of the spread. There's little evidence that the French have ever REALLY understood open market activity, let alone the need markets have for liquidity.
Second, what I don't quite understand is that securitised mortgage bonds should have credit enhancements attached, which means that they shouldn't be poisoned mutton dressed as lamb. Are the credit enhancements only the top 10% slice? It takes some structural strengthening of the bonds for them to achieve a triple AAA rating, but then I haven't read this morning's FT article about fraudsters. Investment banks involved in structured debt weren't supposed to allow this sort of thing, were they? Who did the due diligence?

Had a discussion this morning on the impact of all this nonsense on oil prices and oil supply.

We conclude that any fear induced downturn in demand - even slight - will cause havoc in oil company boardrooms and all new development work will be put on hold in order to choke off what new supply there is coming on line..

Given global depletion rates are increasing this could result in a severe supply shortage coupled with much higher prices. We'll be scrabbling over what oil is available..

If/when/once things settle down then new developments will begin again - cautiously.. But as it can take anywhere between three to five years to bring a new field onstream (particularly offshore) then there will only be a gradual improvement and in fact there may not be any improvement at all give depletion rates.

Just thought I'd send you all off on the weekend with something different to ponder.

Stop worrying everything is going to be fine.

Its under confidence at the moment but fundamentally the drivers for economic sustainability remain.

First on a negative note:
The Sub Prime Market arose because nobody bothered to take Milton Friedman's advice about the Permanent Income Hypothesis (PIH). You all concerned yourselves, whilst studying Politics or Economics at Oxford and Harvard with debating whether Budwieser was brewed with Rice or not. Again pick the bottle up and read the Label.

The Western economy has extinguished the concept of a permanent job, and thus rise of the sub-prime has took hold.

Other points.
All Global stocks are overvalued.

FTSE real level about 5000-5500.

Dow Jones about 10000-11000

China hold a Trillion Dollars and may sell it in a panic and crash the Global Markets??????

Even if it does happen Joe Bloggs in Britain and Billy Bob Bloggs in Texas will still be getting up for work on Monday morning and the Economic cycle goes on.

Billy and Joe will still be working. The jobs market will be affected by this Credit Crunch but every being on this planet are all in this together and we will give each other breathing space..........commonlly refered to has Credit!!!!!

Have a good weekend. Oh, and have a Bud!!

Now that the horse has well and truly bolted, how long till the US government introduces some cr@p legislation related to this sub-prime lending?. An Act along the lines of Sarbanes-Oxley (costs everyone a fortune, doesn't solve the problem)should do the trick.

So basically, banks have invested fortunes in companies that offer large low-interest loans to people with a proven record of not paying back loans. Then they're surprised when they don't pay them back. Duhhh...

I gave up on credit cards and other debt years ago. It always seemed daft to me to borrow money that was only used to buy luxuries. As the Chinese are reputed to have said "We live in interesting times".

What happened to all the expert 'risk assessors' who work in the august financial institutions we entrust our life savings to, and expect to sagely manage our pension funds?

Didn't they see this coming?

They will be laughing in Red Square watching the West melt down financially once again, with yet another generation mired in personal debt, and industry crippled by taxes and bank interest charges.

The Russians have cash and US government bonds, while Western banks piled in like hogs to easy pickin' (financial) slops.

Is not the mass exodus of money from the markets to private equity funds worrying? Look at what is being purchased....Boots the Chemist, a good safe bet as people need their prescription medicine to live. EMI, in hard times you'll hopefully still be able to buy some music to console yourself. Watch brewery stocks, folks might be drowning their sorrows too.

The next indicator to watch out for in the UK is a big rise in unemployment as companies that had been hoping for takeover get disappointed and shed staff to cut costs, and major capital projects get shelved - both caused by the credit squeeze. This may finally cool off the housing boom as defaults would multiply. There could be a sudden glut of houses (and especially flats) for sale if BTL's dump their investments and try to get out of the market without getting burned too badly. Rents could shoot up and homelessness may become a major problem, probably with social unrest. In turn, consumer market collapse would become more likely, which would hurt retail (more job losses, and much less imports, so spreading the damage to the Far East).
The government needs to be ready for this, buying up surplus properties for social housing - because in the UK over the last few years, the housing market has pretty much become the economy, so keeping it propped up with state funding would simultaneously help the homeless and stop the collapse of the whole 'house of cards'.

Great news for the environment if things get serious. Belt tightening and stunted growth = less emissions and a bit more hope for Gaia and the grandkids.

This isnt such a Big deal .. far more benign than the Russian debacle some years ago. Think of it as a mere nipple on the breast of World finance.

Get back to work the lot of you, experts indeed one and all

The fact it is a french bank has nothing to do with it. Securitisation desks are run from London in the main but also Frankfurt.

There is a perfect storm brewing and that is the negative equity cloud hanging over the US predicted for next year. This is only the beginning. This will ripple into other credit markets for two reasons: credit is getting more expensive as liquidity evaporates (hence the ECB action) and that affects everything, and secondly because there is no doubting that if defaults in the housing sector go up, so will defaults in the credit card businesses. All of these receivables end up one way or another being offered into the open market.

The issues are several fold. And of course, the credit crunch is a symptom of wider issues, one of which is that a fundamental level (and it is important to understand that this flows from the grass roots level of the homeowner), risk managers believe in predictive models which assume a narrow degree of freedom, when in fact lenders had no idea how many credit cards a person was holding or was applying for. They believed the receivables were priced to perfection 鈥� and that perfection was based on short term forecasts and profits. And they probably were. But perfection does not mean tolerant! Instead, the system has proven remarkably intolerant to the smallest rises and the supply side of credit has evaporated. Thus, the bonds were issued at the top of the market, and the spreads have since got worse and worse.

This has been waiting to happen since the dollar has started to tank.

The other issue is poor information flow. Many CDO and CDO square/cubed managers rely on static PDF (locked) servicer reports which are a nightmare to administer. The honest to god fact is most of them do not have a clue as to the underlying asset quality. And hence a measly 2 billion Euro suspension by BNP causes such huge turmoil. The market doesn鈥檛 believe the ratings and does not believe the manager understands the assets either. But if there are no buyers, then it is impossible to perform a Net Asset Value calculation and note BNPs press release. This there is no safe harbour and hence a panic. The only option is intervention because at least supply side money is forced cheaper which means hopefully people will start buying in again so that values can be attached.

It is no idle coincidence that the BoE has stood back from raising rates. It cited inflation for not raising it, but the real reason is the credit turmoil (but it could not say it). But just think what will happen when it does raise it - and it is inevitable. Even a 25 basis point rise will be difficult.

Thus, this uncertainty is not going to magically come to an end. Expect at least another year of it. And the outcome: eventual stability yes, but dont expect that to equate with cheap money because fundamentally risk is being re-priced by the market - and not by traders - and that's why we have suspensions becase they cannot control it. In sum, this is the net effect of the internationalisation of the money markets - and that knows no cultural barriers (to return to my first observation)- and hence why the amplification is so loud and disproportionate. It is the market which is doing this, not the banks.

We are not yet doomed to another 30s or even 80s. A cooling down in the housing market here in the UK is welcome as there are many resposible borrowers waiting to snap up properties as soon as they can afford to. Rents wont go up, they will disappear as buy to lets are sold. We have a housing crisis in the UK and it could be helped so long we don't make the same mistakes as the US with the sub primes

Robert, you're being a bit unfair on BNP I think. I don't think their regulator would allow them to buy these securities if they wanted to. The assets in the funds aren't on BNP's balance sheet, they belong to the investors in the fund. If BNP were to buy out the investors the moment the assets looked a bit shaky the regulator would, rightly, say that BNP was bearing the risk of holding the assets and so they would treat them as being on BNP's balance sheet and require them to allocate capital against them. So to avoid wasting capital BNP has to continue to treat the funds at arms length.

As corporal Jones keeps famously saying "don't panic don't panic" this is a crash being engineered by the finacially weak and feeble minded it also provides a platform for the hysterical. The ones who usually get burned are the greedy speculators which is no bad thing. Joe public will be all right in the long run and will probably not realise anything is wrong unless of course the doom mongering media keep banging on about it.

What I find strange about this current drying-up of liquidity, is that French and German banks are the first to be hit. Surely UK banks should be reporting trouble as well and closing their more exposed investment funds, like BNP Paribas? More funny money has been circulating around the City and the UK housing market in the last 6 years than almost anywhere else, including the US and yet we're not seeing an impact on UK-HQ'ed banks. This makes no sense. UK banks and lenders have been some of the worst offenders in terms of dodgy lending and mortgages so why aren't they being hit? They are dependent on exactly the same supply of liquidity as the US and EU institutions.

The only sign I can see so far of this hitting the UK is that a certain well-known subprime lender is one of the biggest losers on today's market (about -8%) which makes sense as they had "dodgy securitised debt" written all over them. Other than that, however, not a peep. Is this just delayed follow through from the US and EU markets or is the UK somehow magically immune to the credit crunch??

Thanks Graeme - 'who runs the Western world ... not the people you vote for.' The damage is always social and financial. The market 鈥榬equires鈥� solely that we go on buying and selling never mind living in those four walls called 'home'! The ideal 鈥榝irst鈥� or 鈥榮tarter鈥� home you buy is after all only as good as your next one for 'they' all seem to make you want to hit the road time and time again ...
What we are witnessing is a new diaspora, communities built on motorways, houses changing hands in a day or two.
So much to be said about a change of heart and modus operandi.

Frankly, I'm not surprised by this sub-prime mess here in the USA. For years I've marvelled at how much debt the average American has. It is said that the average American has sufficied funds (liquidity) to last less than 3 months in the event of a disaster in his/her life.

While Britain has a major over valued property market, I believe that the situation in Ireland is far worse. With the recent wealth enjoyed by most Irish people (EU money) house prices have rocketed from about 60,000 Punts (close to the value of a Euro) to the current cost of a modest 3 bedroom semi in Dublin of 500,000 Euros. Have peoples saleries gone up 10 X in ten years? The answer is NO. What has changed are the criteria for borrowing and now many people have hugh loans with ridiculously high monthly payments. Irelands own sub prime disater just waiting to happen.

It's going to get ugly folks.

Hasn't it occurred to anyone that the Illuminati banking elitists caused this fiasco in the first place and the result is a planned consolidation of power that was put in motion many many years ago? The NWO is ready to spring the trap my unwary friends.

Mr. Peston,

I found the banner pretty offensive also - Poison?

The article is a scare tactic, no wonder the markets are so volatile right now with that kind of rhetoric. Pretty disgusting and reactionary, panic, panic, panic - doomsdayers and naysayers! How typical and short term.

Yes there are some serious problems in the industry. Yes some serious adjustments are in order and expected. The panic just destroys little investors and adds to the overall turmoil the markets have been going under for the last month. You'd serve your readership better with a more reserved approach about what should be done instead of all the hype about what was done wrong and "fraudulently".

It's a bit ironic that the one country that did the most to build the strongest and most free economic system in the world, gave us all a standard of living that's never been seen in the history of the world is so quickly demonized by the rest of the world when there's an economic crisis (and we have yet to see if this is one!!!!) - Where's the press and comment positive when things go well???

You're scaring people out there and contributing to the volutility of the market. In my mind it's somewhat of the abuse of the power your gaining with a well recognized column with a growing readership.

What is really happening is that these funds are taking a mark-to-market hit on their books and holding the assets until the market improves or a stable price emerges. In the case of Bear Stearns the parent company is "lending" cash to the funds to cover their losses which really means they are using their (probably massive) reserves built up to cover such a contingency.

There is nothing intrinsically wrong with not having a theoretical price for a CDO of ABS. Theoretical prices only exist when their is an arbitrage against another asset class whose price is itself solely determined by the market and not a model. A bank note is a CDO of the debt of the companies it lends to which is itself a CDO of the companies' underlying assets ie. a CDO^2. When there is no liquidity in the stock market i.e. during a crash nobody says we should start banning shares or bonds yet there are no reliable models for theoretically pricing either.

In the absence of accurate pricing models or the ability to hedge (fundamentally the same thing) the prudent thing to do is reserve a significant percentage of the profits while the sun shines. The question then becomes "are the reserves sufficient?" After 5 years of a credit bull market my guess is that they are.

I think the conclusions of this article about BNP are off the mark. These funds are probably owned directly by BNP. Therefore in preventing investors from taking their cash out, BNP is actually stemming its own losses. If it paid out now, then the lack of liquidity (and therefore lack of transparency as to what the market thinks the assets are worth) would mean that BNP and its shareholders would probably lose out. Furthermore, the average European punter's pension fund is more likely to have a greater exposure to BNP's share price than it is to ABS funds, so the decision will also probably benefit those pensions funds.

As to suggesting that the "real" issue with the decision is that BNP are not redeeming bonds themselves, there are several reasons why they won't do this. Number one is the exact same point as above. If third parties can't price the bonds then how can they? Secondly, like all banks BNP will have trading limits. These limits will not extend to buying all of the bonds in a single ABS fund.

As a more general point, the reference to all ABS funds being like "poisoned mutton" is rather sensationalist. ABS stands for "asset backed securities" The key is therefore in the title as to what they are. These are loans which are backed by underlying assets. In many cases those assets are mortgage loans which are therefore in turn secured on real estate. In other words people are not lending against thin air. There may be a risk about whether a particular mortgage loan can be repaid but at the end of day there is still a house to be repossessed and sold if that loan is not repaid and the proceeds of that sale comes back to repay the loan. Furthermore, in order to secure a AAA rating, you can't just set up a fund which relies solely on sub-prime lending. You also need the more reliable, more credit-worthy borrowers to be included as well.

Where am I going with this? The article suggests that it is because of these ABS funds and CDOs that there is a problem. This is not the case. The fact that ABS and CDO funds are affected at the moment is down to the subprime market itself. The subprime market is not "financial engineering" The average local bank in Ohio is not going to be stocked-up with City whizz-kids. Quite the contrary, it employs people who sell plain old mortgages - it just so happens that their lending criteria have become so loose over the last few years that they are willing to lend money to almost anybody. It is this that needs to stop. There appears to be a mentality at the moment that buying a house is the be all and end all. It is not. There should not be any expectation that someone who has just left school or university should automatically be able to buy a house.

If folk did an honest days work and shunned borrowing then we wouldna have all this fear and loathing. Having never borrowed a penny in my life, I just laugh at all the saddos - in fact, I think it's a jolly good thing that it is all going wrong for the economy of the west - hooray, may they drown in the sorrows of their own making. My business is going great but the sad old commuters running up to the city every day trying to squeeze another bent pound out of the 'system' will get their just reward - ashes!

So the credit deriverative bubble has burst, I look forward to the next and real big one....companies will start pruchsing virtual product trend instruments (VPTIs,) a representation of a virtual product in their industry combining key factors such as R&D productivity, input prices, labour productivty and currency or interest variations, that allow them to smooth their profits and invest in future profits. They'll be winners and losers as usual, but the real fun will start when products are taken out by individuals......the stories of people who lost millions as they got promoted faster than expected at work, or the famalies who becmane bankrupt due to borrowing against future children they never had will be.....amusing rather than heart breaking.

I wont get sucked in to all this when it comes... I'm off to buy stamps and gold, just as inherently worthless I know but they've been around so long no one will question it while I'm still living....

Well I'm a renter, could have bought into the house-ownership scam three years ago. I was offered an interest-only mortgage, which is just about the dumbest con-trick going.

I opted out of buying because it was clear that interest rates were not sustainable, especially as the forecasts for lending totals was so incredibly high.

I'm the smug one.

We will, of course, be faced with a screaming deluge from all those investors who wanted to join in this south sea bubble. Hard luck. Your avarice and uncontrolled lust for property price rises has come home to roost.

What about the U.K. ? Home-owners have enjoyed the housing boom for so long now, but the old saying 'what goes up must come down' reminds one and is it not the right moment now for them to think about what to do with their much over-valued house ? Perhaps the best way to secure a secure retirement is to sell the house (quick ! Because if the domino effect takes place then one will not only find it less attractive in the offering price, but it will also be harder to find a buyer), put the proceeds into a bank or a building society (with the interest rate on the rise) and cross your legs to just watch the rest of the scene when a possible equity market collapse is on the horizon. That's a possibility that no one could rule out now.

To MB:

The nationality of the Bank is a red herring. The HQ of ABS for BNP is London. And anyway, this is internationlised money markets. It just so happens the two centres in Europe are London first and Frankfurt second. The UK is the leading knowhow for securitisations, followed by Germany.

UK banks will be hit, for goodness sake look at HSBC. The first "rot" to set in was caused by HSBC in Feburary when the CFO said FICO socring could not be trusted in low interest environments. HSBC has massive exposures. And the UK mortgage industry right now is very very nervous and yes it is approaching a tipping point to move into negative equity. In the US it is forecast for negative equity, then the test is not "why should the UK follow" but "is there any reason on earth why the UK should NOT follow"?

After all credit practices in the UK are just as egregious as per the US, in fact worse, where at least in the US a debtor has much more protection. And in the US, stamp duty is higher, which means that prices are less pressured upwards. In the UK the stamp duty is ridiculously low and in combination with 100%+ mortgages, the 3x rules dispensed with, and god awful buy-to-let means the UK property market is also approaching/or has already passed the "priced to perfection" (intolerant) point.

This is not the end of the world, but if inflation were higher, it would be for millions of homeowners. And all because of low interest teaser rates now flipping when base rates are increasing with a -ve equity forecast, in a dollarised global economy when the dollar is weak. Makes it very expensive for US banks to forward pay out of this.

The current forecast by Bernanke for defaults is very conservative. Another conservative report is looking at 1.1 million defaults over the next 10 years in the US alone. That's about USD 350 Billion (yes billion) in losses. And yesterday's turmoil was caused by a Eur 2 billion suspension (not default).

Makes you think doesn't it?

What if high street banks are so exposed to these bad debts that one or more of them fold?

Is it likely? How can I find out what risks my bank is taking with my savings?

The main problem is that the mortgage based securities in which these loans are packaged have no transparency. How does one price these assets? So, people who would buy these securities will stay off, which makes the securities worthless for the short term. Large banks such as Goldman Sachs, Bear Stearns will weather the storm, but small ones will go under. People are jittery in the market and are too greedy. They want to make a fast buck without caution. The people who obtained the loans and the people who purchased the securities based on the loans are to blame for this disaster.

Posting 101 by Donkel above is very much to the point. I do not know but suspect that these funds are an 'arm's length' prom the bank and therefore the bank connot bail them out even if they wanted to. This was the situation in England when Banks and Building Societies were, for the first time, able to buy Estate Agencies under the Financial Services Act brough in under Mrs T. One well known Building Society paid 100 million for a who raft of Estate Agencies (thereby providing very nice pensions to the former partners) only to sell the whole lot for one pound when the bottom feff out of the market. I know 'cos I was there!.

What I would like to know is what happens when China wakes up to the realizable value of the trillion dollors of U.S. Bonds it is reportedly holding?

What should people do?

1. If you have a home, sell it and rent
2. If you have shares, sell them
3. If you have a pension, switch the underlying investments into cash funds
4. Switch any liquid assets into cash
5. Spread savings around several banks keeping under the guaranteed deposit maximum.
6. Reduce credit borrowings
7. Re-assess "luxury" spending. Save the cash instead
8. Prepare for an exceptionally bad financial future. If the problem corrects itself in the next 2-3 years then you have protected your main assets and can re-invest. If it doesn't you will be one of the few lucky ones. If property/shares etc have risen in the meantime and it turns out to be a false alarm, at least your savings will have grown by 4-5% per annum.
9. Don't trust "experts", the government, or the media (or bloggers!). Remember, the only vested interest that matters is yours!

another added comment as I read through these - it's pretty macabre the delight some of these folks seem to have at the notion the world (the west in particular) is going to hell in a handbasket -

amused at the heartache? - Millions upon Millions would suffer if they get their wish - that's a bit more than just ugly -

Bush's laissez faire attitude towards business has failed the world almost as bad as his lack of international peace policy (more like WAR policy for Bush).

The USA has proved over and over again to itself that unbridled captialism will not work any better than pure communism. Neither taken into account the human competitive spirit.

After Bush is gone hopefully a more responsible administration will fix the situation by strengthing regulation to reign in the greed factor of CEO's looking for their next stock option payout instead of the health of their companies.

How long did people really believe they could go on creating this huge wealth divide by simply manipulating the numbers on a global scale. The villains here are the greedy bankers, financiers and private equity overlords who take vast shares of the profits while moving risky ventures on to the pension funds and other institutions that the rest of us mere mortals really need. Let's see who pays the ultimate price; for the money-makers the profits are banked, our saving schemes and pensions, should we be fortunate enough to have them, will ultimately give way. Some of this activity is criminal but punishment will roll downhill.

What I don't understand is that if anyone defaults on their mortgage surely their house will be repossessed. ( That's why anyone with the misfortune of watching daytime TV will have seen the 'Homeowner Loans') If a Sub-Prime holder defaults, why can't they recoup the money owed ?

Maybe that Presbyterian hypocrite some love and some don't will now come out and admit that the financial institutions of the UK & US have in effect created one big casino which by definition takes from the losers and gives to the winners whilst skimming off exorbitant profits created by inventing novel games of chance. Trouble hits the fan when the losers run out of mugs to lend them cash to play, the winners decide they don't want to play any more as the games are either too risky or there is no risk at all whilst they are not ready to take a cut on their winnings. Meanwhile the casino owner has to turn to those that are not even playing the game to shore up their profits. One final thing. My house went up in value by 拢50,000 in two years. I sold it and bought a more expensive one. My son as a first time buyer at the same time bought a house which if he had bought it two years earlier would have cost him 拢50,000 less. All that has happened is that my son is indirectly giving me the 拢50,000 my house has gone up by. Madness, just like extending mortgage terms beyond 25yrs. Stuart

There's nothing new about the US selling Europe substandard investments; they have been off-loading substandard "risk" to the London and European insurance and reinsurance markets for a generation.

Mr Peston, perhaps you should get yourself to a real computer so that you are capable of creating a better, more balanced article instead of the cliche filled mindless drivel you have posted here. Like a typical journalist, you instead choose to use provocative phrases such as "us exports poison". What an ass. No one forced international banks to attempt to recklessly capitalize on the us economy. Blame rests on the institutions themselves - period.

And by the way, are you living under a rock? The other posters are correct in stating this is *not* an isolated problem, it *is* global and systemic. The same fundamental problems will begin to surface in other markets as well. Have you not noticed the worldwide asset boom over the last 5 years? The huge increase in money creation?

To some extent we are all in this together. I find it funny some of you shallow minds are using this as an excuse to bash america when in fact global money supplies have contributed to this situation. Globalisation is starting to show cracks in the foundation. Additionally, many global economies are not nearly as "fundamentally strong" as some of you mis-informed posters would believe. What happens to these economies when they take massive negative hits on their foreign asset valuations, and export growth slows?

Many, many americans such as myself have been stating the gross structural problems this country is facing so there is no reason to rub it in. Believe me, many people are aware of the problems and want change. But we aren't the only country with structural issues.

It is a little ironic that people keep pointing out the massive amount of debt based consumer spending that is occurring, and stating that it needs to stop. I would tend to agree, however the irony is that many people that are stating this fact do not realise how much this will affect the economy worldwide.

Quotes such as "the world is financing america's lavish lifestyle" are shallow at best. Countries are financing the debt to fuel their export and fdi growth. It's a vicious circle of inter-dependency.

And while I would agree that many americans are dumb for spending on credit and saving nothing, it reminds me of the following quote from J Paul Getty:

"If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem."

Who is dumber, the person getting something with no risk, or the one supplying the product to someone with no money? By the way, a lot of this is going on in the UK and elsewhere.

I'll leave here, and say farewell to my friends in the UK and elsewhere. Let's hope we don't all get burned to bad.

...i'm not worried...my concious is and has been clear for many years...it's just been the years lost in the constructed and confusing diatribe...

According to you all, I have a house in US. If the roof collapse where will I sleep?

I do think the apportionment of blame in the subprime crisis is misplaced. It is the subprime lenders and the subprime borrowers themselves that have precipitated this situation in that loans should not have been made to individuals who could not repay them in a less benevolent interest rate environment. That, perhaps, is the fault of the subprime lenders (lending to those they maybe should not have lent to) and the subprime borrowers themselves (overstrecthing themselves without thought for what could happen should interest rates rise (as they have)). All CDOs are are a repacking of that debt that is outstanding - without the subprime debt, there would be no CDOs issued that are backed by such debt. CDOs did not create the subprime debt, or indeed, the current crisis. Further, the repackaging element of a CDO could actually mean a soft landing for the global economy as the risk in the subprime mortagage crash is dispersed amongst a more diverse range of market participants than would otherwise be the case. Castigation of the CDO market, the wider securitization market and the derivatives market is short sighted, alarmist and ill informed.

Tulips anyone?

"Don't worry abbout China getting rich while we decline, The Chinese economic miracle depends on one thing - US & European consumers to buy their products. "

Not for long, old chum. Within a couple of decades, the primary market for Chinese goods will be China, just as the primary market for American goods is currently America. You're proceeding on the assumption that only the US and Europe have the cash to buy all those goods. Spot the flaw in that analysis?

Living in Australia where 'Big Buisness' rules and no advisers can ever be trusted, one has to ask one simple question. Where on earth can one invest savings with little or no risk?
Many retirees have found out that there is no such thing as a safe investment, when greed is allowed rule!

People used to save up to buy things, now people buy things and then save up.

But people's lust for goods is stronger than their ability to pay for them. Combine that with banks eager to lend money and is it any wonder we're here today?

At last the feel good bubble is bursting and it augurs well for the common man.It is the price you have to pay for the hype being created on the global economy and Asian market in particular.Well you are going to pay a heavy price for putting your eggs in Indian&China basket.Greed has driven you mad and let better sense prevail atleast now.

Eat the poisoned mutton, every last mouthfull.

I have never seen so much hindsight (the most exact science known to man),in one site.
My own worries were alerted by the spectacle of large numbers of workers in the city ,of very mediocre talent, making 拢1mill plus bonuses and convincing themselves their friends and family that it was all due to their skill and expertise.
That could not contimue for very long.

Surely if Bear Stearns has to bail out two funds and then admit they were worth "very little" (大象传媒 News 6th August) no wonder then there is a crisis when BNP reveals it is unable to place a value on funds that had been valued at two billion euros. No body knows how many other funds are in the same situation. Given too the likelyhood that all funds will have some degree of exposure, directly or indirectly, no one could be immune. The news is focusing on the banks but does anyone know what the exposure is of U.K. investment trusts and pensions funds.

I'm very concerned about the prospects for Porsche dealers in London.

Those annual City bonuses are looking a bit iffy at the moment. Or rather - they better had be !!!!

Looks like the only option is to save that cash.....or buy some of them gold bars

Dan,

Good point on the nationality of the banks being irrelevant and it's true that London is the capital of securitisation products - so why aren't we hearing this in the UK media? The emphasis in the story is on the irony of a French bank being hit first. That's what really makes me think: most media here are emphasising the fact that the turmoil is hitting the European and US banks - there's absolutely no mention of HSBC or of the fact that Barclays was exposed to the Bear Stearns funds. Clearly everyone is nervous about the effects on the UK economy since the two (now shaky) pillars holding it up are the banks and the housing market, both of which are intertwined. At least the French and Germans have some engineering to fall back on...

I find the media's campaign of talking up the housing market (e.g. recent stories that housing would be at astronomical values in the next five years) and ignoring this current credit crunch's impact on the UK banks very eerie and a sign that the spin doctors have taken over the country. If the rest of us can see the underlying issues staring us right in the face, why aren't we hearing it declared openly by the powers-that-be?

"Ubi pus, ibi evacua..."
(and it stinks nauseatingly, personal experience)

We are at the Tip of the Iceberg and much much more damage is yet to come in the mortgage, CDO and etc. markets. Always remember, Derivatives are Toxic Waste.

Besides these mortgage instruments we have yet to see the major hits in the Credit Default Swap Market and these will begin to hit.

Would suggest between here and the end of October there is going to be many many more funds, mortgage companies confessing their sins and many will close and with large losses.

Watch the FED, if the FED cuts rates, it will be just not 25 basis points we are looking for at least 200 basis points over time. The US Dollar will be scarificed and we should see a drop below 78 on the index and a drop to 71 69 area.

We are approaching a Systemic Risk and the Central Banks know it and that might just be one of the main reasons we are seeing the pumping of liquidity into the system.

Cash and Gold are Kings in this market.

It seems to me that 'America' (represented in this context by Federal Reserve, the Oil Giants etc) is just going about things in the usual way.

It's a true 'Cowboy Culture,' and as with the famous British Cowboy Builder, if you aren't quick, clever or informed enough to spot when you're being ripped off, then that's just your own fault.

Markets collapse when they rapidly lose value, and the subprime fiasco has been caused by people sucking massive amounts of value, or money, out of the system.

So one might ask, in the classic journalistic manner, how, where, when, and to whom, has all that money gone? Or, more simply, follow the money.

It would not be a surprise to find at some point in the future that the organisations that defined the structure and operation of the system turn out to be the only real beneficiaries of it.

Usually that's OK because we often all get a little bit of extra in the fallout.
Isn't there a word for that also...

Should we all now head for the hills and start growing our own food, or will it all sort itself out in the wash?

It's a real cliffhanger.

The sub prime fiasco throws up a lot of questions related to global growth. perhaps in the long term it may result in a rethink on the huge derivatives markets which has very often and at the best of times been nebulously scrutinized by regulators.More skeletons are likely to tumble out of the cupboard and it is likely to impact growth globally and the addittion in liquidity seem to be a kneejerk reaction though one cannot think of any better short term remedy.Will this result in a more balanced distribution of resources with the asian economies largely insulated from these woes standing to gain in the long term?

Don't for one minute think that American Banks have been the only ones generating toxic loans. UK banks have put plenty of "Lie to Buy" loans out there, and an equally bad (if not worse) housing bubble has spread throughout Europe.

America was first, but it won't be the only credit market to go down in flames.

i really love reading all the post. most of these individuals are very articulate and well versed in the art of communication. bravo to them all. ray in venice, ca. thanks for letting me have a word.

I shall admit that the problems with the multi-seller funds and SIVs (or even SIV lights) issuing ABCPs are a rather unfortunate occurrence so close to the 15th of August. Yet I am weary to say that the sub-prime woes of the US shall be transformed to a global ressession.

I mean the cash-flows of the companies are still there, and they are some very good numbers. Russia, China and South East Asia are not so much exposed to the sub-prime risk as the continental Europe (and i think only UFJ has a ABS ABCP SIV in action) and they are still booming.

Yes 1.3 trillion dollars is a lot of money and a credit crunch could spell some hard times for the western world but the Fed's decision to accept MBS as collateral on Friday actually shows that work is being done to target the issue at its root (rather than the shotgun shock therapy of ECB to provide money with no knowledge if it is indeed transfered as liquidity in the market).

So let us all just wait and see what the week has in store for us. I guess if on the 15th the investors start running for the hills with their money (Goldman involuntarily springs to mind) it is inevitable that this correction spells the end of our current bliss. But even so the world economy is way too healthy to be thrown way unbalance by just that.

In the end of the day, it is simply risk, perhaps larger than we thought, so what? Price it and let's get this over with!

PS [ Let's not forget that the added volatility is jolly good news for some folks in the Square Mile, but to each his own.. ]

There is enough in the world for every man's need, but not enough for even one man's greed

Precious metal anyone?

Apparently they lent money to people who didn't have jobs or were homeless !

Why blame USA or China? They didn't force British and European investors to buy their CDOs / squared CDOs. Greed knows no boundaries and this is precisely what happend to investors who lost money. They didn't assess the risk therefore they are paying the price. Btw, the worst is yet to come when things go bad in China and India. Then the ripple effect will be much more wider and violent, as the magnitude of risks associated with the investments in these countries is not known.

I had a fairly lengthy investment meeting with one of Barclays "Elite" sales team at the start of the year. I'd not normally talk to these 'people',but I had a need to get some current tax advice on an investment issue and this was a way to get it.
I let him talk his spiel and then forgot about him.I'd be kind to call him clueless and yet this is the so called top of the tree in financial advice.This is what underpins all you see going on around you in the financial markets.
Then people wonder why we have these wide swings in the financial markets.
It's very simple, people who really know what they are doing and are in control of themselves profit from all of those who do not including the clients of financial services companies etc.
I'd sum it up as the clueless leading the blind.

I got out of property and all paper and into krugs.

My current mission is to investigate and develop working prototypes and manufacture a stock of guillotines (eezee 100% no money down finance available - just for the irony) to meet future demand

If we think this through to its logical conclusion. Is this going to stop the worlds economic expansion? No. Is it going to force up the cost of borrowing? Yes. Company's with low debt or investments coming on stream will increase sales & profits. Large global companies will gain larger markets & profits at expense of smaller organisations because of access to lower cost credit. Capital will be attracted to investments that generate income rather than being tied up in non income producing "assets" like houses. The rate of innovation in new products & services is continuing to expand. Theres no major war or likelyhood of one because of the interdependence now of all world economies. In other words its time to sit back, relook at the world scene & realise that prosperity is increasing. That mankind is approaching its dream of not having to do dangerous repetitive work because that's a robots job: we just now need to work out how we will enjoy ourselves.

It beggars belief that we should be expected to save for our own retirements, only to find that our hard earned cash is being squandered by overpaid "kids" sat behind computer screens. collecting 6 (or 7) figure bonuses at the end of each year for playing Russian roulette with our futures.

I for one will be getting out as much money as I can, from as many pension schemes as I can access, as soon as some sanity has been restored, and place the money where, OK, I will not make the potential higher returns that can be made from the stock market, but where it is safe from incompetant idiots to play with. Cash ISAs seem a good place to start.

It is wrong to say derivatives are toxic waste. That is rubbish. Derivatives are complex. I return to my earlier comments and leave my round off at this:

1. The uncertainty is fuelling the volatility. It will continue and the credit defaults in most consumer areas will increase. Negative equity and that all of these factors will also impact corporate America.

2. Credit defines the money marks., The impact of poor liquidity is much more serious than Enron tanking. MUCH MUCH More. It affects everything.

3. The symptoms are "controlled" by the markets not the banks. The banks can only put in place structural reforms which deal with market fears

4. You cannot price what you do not understand. Hence, the real symptoms is the lack of liquidity and that is because there is a fundamental structural defect in the market place which is lack of (or "asymmetry") of information. The rating agencies have no idea how to price the funds and the predictive models are either useless or becoming useless. So, no accurate pricing, no confidence, no liquidity. There simply are no buyers of the financial products.

5. The real solution is to get electronic information flow into and between all the participants. The problem is that the originators and trustees do not share the information, quality ratings information is therefore hard to come by, and in any even the information is not "liquid" it is a locked PDF (not even a flatfile).

6. If you want to remove the amplification being caused, get to the heart of the issue and address the severe informational issue problem - because at least then you are introducing certainty.

If you will, large portions of this aspect of the market are working on the basis of the equivalent of "pen and ink" - when we all know the equities desks have embraced STP and electronic trading years ago. Information is not being shared. Information that is being shared is poor, slow and time consuming, making it impossible to rate.

To NY CDO Structuer: I can almost guarantee you are issuing or relying on static reports.

DATA FLOW IS KING 鈥� data flow needs automating and the ratings need automating and in a proper sensory environment. To any other ABS professional out there, I work at a major European bank in ABS STRs and CDO, and we have just reveiwed a scnandinavian software system perfect for this (Creditview AS), which we are reveiwing for our own portfolios for STR and MBS securitisations which we will float off. But at least we can then price.

hi everybody, I wonder if I may ask a naive question. Financial stuff isn't my area.
I thought the point of a free market was that it was self-regulating, which is why it is allowed to be free. Those who made mistakes got hurt, and either left the market or learned from that mistake.
So why are governments around the world, and especially the American government (the great free-market champion) pouring in billions to prop things up? Doesn't that just protect people from themselves so they can make the same mistakes next time?

In my humble opinion, perhaps we have had this bull market way too long. Dow falls on the day and everybody talking about Great Depression, perhaps they should be reminded the 30% drop of 1987 or the 20% drop of 1998.

Market correction or not, it is becoming more evident that we are entering a bear stage. The US economy has been in recession since at least late Spring. The cash-flows and profits do not tell the full story, even a first year economist knows that in a bull market inflated equity prices can well lead to a short-lived surge in rosy accounting statements.

Some are now talking about the Fed saving us by slashing rates, how much 2 50 points? Will that really be enough? We need a slash by at least 2%. Imagine what will happen to the currency markets then (ow and dont forget the gigantic trade deficit with China).

Let this be the waking up call for us all, the global market is nowhere near as healthy as some would have us believe. Stormy days are coming and we had better brace for more turbulence.

"YOU REAP WHAT YOU SOW"

What does 'Made in USA' mean now ??? American Financial advisors have sold a toxic product to the rest of the world, and nobody had the grey matter to say 'hold on, there's something fishy about these bonds-who exactly is going to pay for them'. America has become corrupt financially speaking, and backrupt economically speaking, because the productive infrastructure is now outsourced to other countries. Now America, needs to clear up this mess, and fix it's society. But if that were to happen it would need twice as many prison places, to account for real estate salesmen, real estate brokers, financial advisors, liars, banking officials, etc... It seems Wall Street exported junk. The first thing to end will be the financing of the US trade deficit, and then the dollar will collapse, inflation, economic depression, social chaos, crime, trade spats, etc...

Terry - but you live in Australia. If you lived in the UK you would take a different view. I was struck by a comment in April from the Boss of the Confederation of British Industry which I've dug out of my email archive for you..

He said "In today's rapidly changing economic world order, we must create more global enterprises if we want the UK to remain in the top tier of world economies. Yet in the past 20 years the number we have built from scratch has been low."

As I love pointing out to people I know that work in the financial services sector that 20 years coincides almost perfectly with the deregulation of the City. What astonishes me though is that they actually agree with the implication.

Last year a director no less of one of the big life companies told me that he knew that the institutions weren't investing anything like enough in things like high growth start-ups but the problem was mainly big shareholders of the fund manager variety who were very opposed to this sort of thing.. Scary stuff really when you realise that actually these people have more real control over the direction of our economy than Govt does..

Sun 12th Aug

Robert,

Am I missing something with the latest UK and continental stock market crash's.
All the trouble stems from "sub prime loans" in the US so we are told. News bulletins and newspapers said stock market crash, da di da di da. However, for the week, the Dow finished up 0.4%, the S&P gained 1.4% and the Nasdaq rose 1.3% ?????? Yet in the UK the FTSE fell off a cliff and similar in continental europe bourse's
Take Barclays bank, record interim profits last week but its shares have fallen 14% in two weeks the same applies to Lloyds TSB. Both with limited exposure in the US. Something stinks about the whole situation, the role of Hedge Funds and the influence its people have on the market. At the beginning of the week the Bank of England, the European Central bank and the Federal Reserve should have asked all banks and lenders what exposure they have re "sub prime debt" Come on Mervyn King at the BoE, Hector Sants at the FSA and his equivalent at the NY stock exchange commission, ask some leading questions.

Whilst this crisis is one of the banks own making - too much liquidity and lending without proper credit controls - the concern must be that this credit crunch does not stop with those banks that have lent to the sub prime market, but starts hurting the 'real economy'. If the banks and hedge funds need to start fire selling their assets to cover their losses then this will hit everyone across the markets - currency, commmodities, equities, etc. This in turn will cause a wider panic and lending will cease across the board including the firms many of us work for.

However, I am also concerned that the behaviour of the central banks is exacerbating the problem. Pumping liquidity into the system, as lender of last resort, or even dropping interest rates, as Greenspan did after 9/11, to protect the financial systems is, I fear, proving counter productive, as the banks are factoring this is into their lending risk assessments. Ultimately they feel they can lend more loosely as the central banks will intervene when things go wrong. This is simply making future corrections more severe and volatile.

in the nineties it was 'collateralised mortgage obligations residuals' and 'variable rate notes' ---- products which bear a more than passing ressemblance to the current crop of 'seen you coming' financial products - i can assure you as someone who worked as a proprietary trader for some of the snazziest derivative trading firms that there is nothing new here at all..... what surprises and disappoints is that the bbc's business coverage is so lame that it wasn't competent to forewarn people in spite of the hysteria in the markets for literally months..... plus c'a change....

I do not recollect anybody posting here talking of those who are the cause of the market crisis, those living at the margins of our society, the economic slaves that feed the aspirations of middle and upper income people.

Maslow describes the necessities of life in a triangular diagram:

People who have defaulted on loans are mostly good honest hard working people struggling to live as best they can. They are now denied one of our most basic needs, affordable shelter. They have been betrayed in this respect.

World governments have adopted market driven economies and are all using the new currency of debt, which is an intangible asset. If you cannot hold it in the palm of your hand then what you have is nothing. It is all a by-product of sophisticated electronic communications an undiscovered country yet to be tamed.

It is not the markets that will fail us, it our politicians, those empty headed but accomplished orators who rely on advise from economists who are unable to get a handle on vapour ware. The intervention of central banks using government funds is the beginning of the end for market driven economies.

The markets should have been left to their own devises. You cannot change the Darwinian nature of business; only the fittest deserve to prosper as life is all about risk and its management.

You'd think the world was about to end reading some of these comments! There are a few people posting here that would almost be happy to have correctly predicted the worst. There is going to be a correction, which may or may not result in a recession, but the world is no longer reliant on the US economy to generate new growth and it is likely to be fairly mild. Asia and Europe are generating their own growth and will pick up a lot of the slack. I'm sure there will be fall-out, but with the global economy clipping along at 5% or so it is well-placed to weather the storm. Even the UK economy is overheating at the moment!

All very interesting commentry and analysis above, but it seems to me that the clue to it all of this turmoil is in the name of the loans.
Just what does anyone imagine is meant by the euphemism "sub-prime"
The name says it all for me.

You are watching the downfall of America. America in the past 20 years has destroyed all the industry it has. Now consumer spending is over two thirds of the American economy, and the consumer doesn't have any money any more as they are already in a lot of debt. Now the American housing bubble is popping, what does the country have left? The UK is in a similar position.

There is no UK/US Economic model any more as the UK Economy is much more internationalised one these days than people imagine.

If this was the 1970's then yes the UK could go the same way as the US economy. However this is the twenty first century and the UK is much more immune to the problems that the U.S. Economy is having.

Yes we have a large debt problem in this country but we also a major five to seven year debt cycle, with most loans being repaid or refinanced within that cycle.

This is a lot different to the 1970's when we had a twenty year debt cycle and were much more vulnerable to interest rate changes and the state of the international economy.

We also have a government borrowing program that must repay the money borrowed within one ecomomic cycle.

So although we do have a lending problem in the UK, the UK Financial systems (and thus the UK economy) is much more robust then people give it credit for.

The US on the other hand have a much more long term credit policy, borrow year in and year out and have no viable repayment strategies.

Instead they just reply on capital inflows to bail them out and this cannot continue.

For although the us has products like CDO's and CDO Squared. These products are worthless until America tackles its debts problems head on.

AsChina will no longer be just an investor in US Financial Products and other countries with fiscal surpluses will follow China's example in the Long Run - Look at Latin America.

The US has got to restructure its government and its financial institutions if it is going to survive in the current econimic environment.

A major collapse in the dollar is coming becuase the american economy is currently built on a house of sand.

However this collapse in the dollar will act as a kind of international immunity to America's woes (this time) and will not lead to an international economic collapse.

So I feel that the end result of all this will be that sterling will rally to 2.40 against the dollar, the euro to 1.70, the yuan will freely float and will revalue by 15% (not the 40% that the americans want, European and UK interest rates will move into and remain in a 5-8% band, American interest rates will fall into a to 2-4% band and US Inflation will spiral out of control. Forcing a restructure of the American economy.

So although I think America is going to go the same was as the UK economy did in the 1970's. It is not going to derail the international economy and the rest of the world is, this time, going to escape the turmoil that the Americans are facing.

We survived the collapse of the Russia economy and we can survive the ending of the American superpower era as well.

So I believe that this is purely an american problem and that the international instiutions are, this time, strong enough to withstand it. So dont panic - but, for the moment, invest in America at your own peril.
For the current high American stock market values will be corrected by a major devaluation in the dollar - mark my words.

american housing collapsing..leading to hedge funds collapsing meaning all the extra money which is fueling the market is dissapearing.. china being a big bubble and bursting also...

at the end of the day.. its just a similar story to the weather.. when its good people say we're going to have an indian summer, when its bad people say the worst is yet to come..

wanna see something sobering? look at the compilation of CSFB graphs at www.recharts.com.

Then look at the one that has the monthly amount of loans resetting.

picture the borrowers unable to get new credit as their old ARM's blow
sky-high in rate.

in the US, it takes 60-90 days to get a notice of foreclosure, anthor 60-90 after that before the lender has the home.

based on the graph i noted, we at least 22 more months of mortgage resets (before the OptionARMs start their own blow off) given the lag time in foreclosing a property.

this will be $500B to $1Trillion lost by the time all is said & done.

It is easy to think like that but in reality that is not the case. 10-20 hedge funds 1000's may blow up. At the end of the day, there are enough assets out there that need to be managed which will keep the hedge fund managers and hence the prime brokers in jobs.

Buddy, I'm with you there... the economy is like the weather. We can do our best to predict, but end of the day it's all interlinked... and a butterfly fluttering its wings in Madagascar can lead to a hurricane in New Orleans...

A few words on the otherwise sensible maxim that "cash is king":

a) All money today is 'fiat', meaning not one currency exists which is backed by tangible assets. IMF rules requires this to be the case. This has been the situation since Nixon closed the Gold window in 1971.

b) In double-entry accounting terms, the other side to cash is debt. ALL money is created when loans are made and debts incurred. In a fiat currency world, cash equals debt.

c) In history, not one single fiat currency that has ever existed has survived. All have failed without exception.

d) The reason for failure is simple. Governments and central banks are free to 'create' as much money as they like to finance their favourite projects, including wars. In the absence of financial discipline, money creation tends to expand at an ever-increasing rate. Like a ponzi/ pyramid scheme, this can continue for a while but not indefinitely.

e) People holding cash finds that it loses value in direct proportion to the amount of new money that is created (monetary inflation). Today, new money is being created at unprecedented rates. (UK at 14%, US at 13%, Australia 13%, Russia 42%). Still feel safe putting cash in a bank and earning 4-5% interest before tax?

f) Money creation is no longer in the sole hands of the central banks. They have lost control and we are now subject to unfettered Wall Street securities based finance. We are told that derivatives have improved risk management. However, with approx $400 trillion of derivatives in existence, compared to total world GDP of $40 trillion, there is little room for error.

The alternative?

Invest in something tangible the supply of which is relatively fixed. Precious metals have fulfilled this role for thousands of years.

Not one gold-based currency ever failed.

The problem with gold-based currencies is that governments are unable to expand the money supply as they see fit and hence find it difficult to finance wars.

Yaddah Yaddah Yaddah Blah Blah Blah Ummmmmm... Gold!? Silver!?

Hey guys,

Derek from the good ole US. I have to completly agree with ya'll. I'm only 25 and I've seen this coming for 3 years now. Our "poor" have $350,000 homes, 50" plasma screen TV's, and 2 BMW's in their lots. Yes, my friends over the pond, something is wrong. People here are clueless as to what is going on. I live in Florida where most of this housing mess is occuring. I do not buy Chinese or Indian goods because they are unsafe and they use slave labor. I am tired of this mess and wish we'd go back to trading with eachother and not these cretons.

Your friend,

Derek

Robert Preston's brilliant article explains clearly and concisely what has caused the latest turmoil on financial markets. He also highlites perfectly the potential risks involved when central banks bale out imprudent lenders and greedy banks and fund managers who will only do it all over again if there are no consequences to their actions.
Well done the Bank of England in not following that example, good on you.

Read post #98 and weep. Americans and Brits can hypothicate all they want but truer words were never spoken as they have been posted by Greg from Ohio.

All financial markets are manipulated to fulfill elitist and political agendas. So discuss these issues all you want and try to figure it all out. Good luck. It ain't gonna happen. Things happen when and where the elite want them to. Money, wars, disease . . . you name it. If the US falls it's just one step closer to the NWO. Been reading about the NAU lately?

So bend over and kiss your arses goodbye. You have no power and no choice. Carry on......