Hold Tight for a White Knuckle Ride

Daily Mail (London), August 17, 2007 | Go to article overview

Hold Tight for a White Knuckle Ride


Byline: Alex Brummer

THE tremors from the earthquake in America's high-risk mortgage marketare starting to threaten a financial crisis as big as anything seen since thecollapse of Western stock markets in 1987.

Indeed, it is already being dubbed the 'Crash of 2007' by experts in the creditmarkets, where banks and financial institutions lend each other money.

Any hope that the massive injections of cash into the markets by theFrankfurtbased European Central Bank, the Federal Reserve in the U.S. andcentral banks around world would calm matters has been rudely shattered.

With each passing day the worries about the mortgage, borrowing and creditmountains built up over the last five years, worsens with share markets nowseriously wobbling.

In London, the FTSE-100 index has fallen 13 per cent from its peak, crashingthrough the 6000 barrier in the latest trading.

A fall of 10 per cent on the stock markets is normally considered 'acorrection' but confidence and share prices have now moved beyond that. Fear isthe driving force among investors who are desperately searching for safe havensfor their money.

When trouble emerged in the little known 'sub-prime' or trailer-park mortgagemarket in the U.S. earlier this year, few people guessed how far reaching theramifications would be.

During the credit boom in the U.S. and around the world, which followed theshock of 9/11, American banks and mortgage lenders financed a massive housingboom.

So confident were they that house prices would keep on rising that they becamereckless in their lending, offering money at higher interest rates to thepoorest sections of society, without the proper checks on their income and bankaccounts.

It is these high-risk debts that are known as the sub-prime market and anastonishing [pounds sterling]675billion ($1,350billion) was provided to sub-prime lenders, some13 per cent of America's total mortgage lending of [pounds sterling]5,200billion($10,400billion).

What was different about this particular lending boom was the ability of theoriginal lenders - which included Britain's HSBC - to offload the debts andsell them on to other financial institutions around the world.

The investment bankers on Wall Street and in the City of London broke up thedebt into small parcels and sold them to investment and hedge funds, callingthe debt parcels 'assetbacked securities'. Initially, these parcels of debtwere seen as highly attractive because they carried a higher interest rateyield or return than normal, at a time when official American rates wereextraordinarily low. …

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