Subprime crisis forces cuts in economic growth estimates
Bank of China, the second largest bank inChina, reports heavy subprime exposure, $9.7 billion.
Gosh, wasn’t all this supposed to be contained? That’s what the talking heads said… Condos and commercial real estate are at risk too. I mean, don’t even think about trying to sell a condo in South Florida. Over 65,000 are already for sale, with more being built – not that the new projects have much chance of being finished, most will go broke, leaving unfinished buildings and rancorous lawsuits in their wake. Wall Street whistled past the graveyard this week, but soon enough the goblins will make their appearance again.
Too many will be get mangled by the subprime crisis. Millions will lose homes, other their jobs. It’s more than just in subprime now, all types of mortgages are affected, and credit card interest rates are going up too. Businesses are finding it more difficult to get loans, and those that rely on short-term loans to keep going will get hammered.
Was it greed? Or “irrational exuberance”? There’s always the classic, “This time is different.”Â But it wasn’t different. The bubble popped just like all previous bubbles have. Suddenly and quickly. One of the biggest problems was leverage. If you buy $1,000 of stock with $1,000, and it drops 15%, you are down $150. If you use that $1000 of stock as collateral to buy $10,000 dollars of stock, and it drops 15%, you are wiped out and owe money to boot. That’s been happening to hedge funds. Except some of them were leveraged 100 times or more. Madness, isn’t it? But it gets worse
Suppose your leveraged hedge fund needs to sell stuff to raise money for the margin calls, but much of what you have is mortgage-derived securities, and right now, no one even knows how to price them much less wants to buy them. So you can’t sell them, even at a loss, even if you want to.
But it’s not just the hedge fund that is hurting then, it’s those who invested in it too. They could be your bank or credit union or retirement fund. It easy to see how this has metastasized from a subprime crisis to a much wider credit crisis.
And it’s really only just begun.