大象传媒

Worst over - or not?

• Robert Peston
• 1 May 08, 07:20 AM

Fill your boots with sub-prime, asset-backed securities.

That's the implication of the Bank of England's latest .

Actually it would not put it as starkly as that, since the is not - as far as I am aware - authorised by the to give investment advice.

But the big message of its latest Financial Stability Report is that the cost and availability of credit, on the one hand, and the price of certain investments - such as securities linked to subprime - now exaggerate the risks in the global economy, where for years they were understating them.

Some will say that the Bank is stating the obvious. But as a public statement, this represents a significant change of emphasis. For years, the Bank argued the reverse, quite correctly - and more's the pity that it was systematically ignored by the City.

Subprime lending was, during the credit market euphoria of the previous few years, the extreme case of banks ignoring the golden rule that they should never lend without checking that the relevant borrowers can repay.

But what a difference nine months make: the pendulum has swung so far that financial institutions are currently assuming that losses on subprime will be on a scale without any precedent.

The Bank of England thinks their fears are exaggerated. It now believes that the market price of subprime investment products overstates likely future losses on subprime lending by about 100 per cent.

How so?

Well, because of the collapse of trading and liquidity in that market, prices imply that losses for providers of subprime loans will eventually be $400bn. But the Bank calculates that actual losses should turn out to be less than $200bn, when all the potential defaulters have handed back their keys and their respective properties have been seized and sold.

That means anyone prepared to buy subprime now and hold it to maturity would make a mint (more than $200bn if you were to buy the lot).

It also means that banks such as Royal Bank of Scotland which have been savagely marking their subprime exposure to the depressed market price may well be writing back those charges as handsome gains, in the coming years.

As you can imagine, I urged the Bank - on behalf of us poor taxpayers - to turn itself into a public-sector prop desk or hedge fund and go massively long of CDOs, ABSs and all the rest.

And if it succeeds in knocking 15 percentage points or so off the national debt from the future subprime gains, surely no one will begrudge me my 20%, hedge-fund style cut of the spoils for suggesting the big play.

No one could accuse the Bank of England of insider trading, since it has perhaps gone beyond the call of duty to create the conditions in which banks and financial traders see sense about the real risks out there - by launching its 拢50bn-plus scheme to allow banks to swap unfinanceable mortgages securities for the equivalent of cash.

Oddly, the Bank doesn't wish to put its analysis to sharp commercial use. As I said, the point of its subprime calculation is to persuade banks and other financial players that they are now too fearful of the risks of lending and investing, where before they were systematically ignoring those risks.

Or, again to stress the point, if all manner of loans were too cheap and easy to obtain prior to last August - and stoked up that financial bubble for which we're all now paying - credit is now disproportionately expensive and tight.

For the Bank, this is grounds for modest optimism, in the sense that it hopes banks and controllers of huge pools of liquidity (notably the massive US money managers such as and ) will gradually realise they are being neurotic about the outlook and will start to lend to our banks again at longer maturities than overnight and at reasonable prices.

But the Bank acknowledges that there is a substantial residual risk of lenders not seeing sense. In which case, lenders would bring about the very thing they fear most by continuing to restrict the availability of credit - viz the collapse of over-stretched borrowers and further falls in asset prices which would generate incremental, spectacular loan losses.

The kernel of all our problems remains what it was, a chronic shortage of liquidity in the banking system. And normal conditions should at some point return. But the Bank cannot predict when that will happen nor be confident there won't be another banking or markets accident in the meantime.

Which means that if you see the Governor propping up the bar in your local hostelry, it's probably not worth asking him for an investment tip.

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