Stock markets getting an absolute spanking

[Monk]

Well, it depends how highly he values the currency of baking.

[The People's Hero]

Well, it depends how highly he values the currency of baking.

You know the price or everything and the worth of nothing m'boy.

Just because Asda can't legally sell their jam doughnuts when the BBE date has passed, doesn't mean they're worthless.

Mumble mumble grumble mutter point shake head mutter sigh tut leave.

[James.]

Someone clever needs to explain this to me...

This all results from the sub-prime over-lending and the fear in Banks preventing them from lending to each other, but...although I accept the liquidity of an institution is effected if they are holding bundles of bonds of defaulting mortgagees don't they still retain the premises the loans have defaulted on? Therefore, are they not still viable as institutions to lend to and therefore isn't all of this panic selling just a load of bollocks?

I don't get it.

Apologies if I'm going over stuff you already know but I'll try and give the whole picture for those that don't understand ANY of it.

1. The US economy was booming, house prices were rising, interest rates were low.

2. Commercial banks in the US were dishing out mortgages to anyone happy in the knowledge that any perceived credit risk would be mitigated by the fact they had security on an asset (the house) enjoying substantial increases in value.

3. Reports suggested money was being leant out to people with NO proof of income, NO job, etc. And we're talking large amounts of money.

4. The US housing market slowed and interest rates began to rise. In fact house prices started to fall and the great unwashed (the sub prime borrowers) now couldn't afford to pay their mortgage, thereby defaulting.

5. Meanwhile the commercial banks in the US had packaged up all their nice little sub prime mortgages and sold them on to investment banks who, with $$$$ signs in their eyes, saw an opportunity to make a lot of money.

6. The investment banks created structured credit products from these mortgages which, through a tranche system, meant that effectively a package of sub prime mortgages could be awarded a AAA rating by the rating agencies.

7. The tranches were either sold on or held on the books of the investment banks.

8. However with house prices falling and defaults rising these credit products suddenly started to fall in value dramatically. Investment banks were holding $billions and were forced in to writing down the value of the products in line with mark to market accounting standards.

9. No one really knew just how much exposure these banks had to the sub prime market and therefore were reluctant to lend to each other (this interbank lending is crucial to the sustainability of the financial system), thereby causing a liquidity crises.

10. What sorted as a slowdown in the US housing market had spread through the financial system and into the real economy, partly leading to the fears of a US recession which is one of the main reason behind the sell off in equities over this week.

So Daggers in answer to your question the problem lies in the fact that these mortgages have been defaulted on and are therefore worth nothing/impossible to value. The value of the actual security (the house) has fallen as well due to a housing recession in the US. So all of a sudden investment banks and other institutions are holding A LOT of garbage on their books, threatening their capital base.

The stock market volatility in July and August last year reflected the sub prime crisis. The volatility over the last couple of days is more a factor of fears over a US recession, worries about bond insurers (who effectively insured these sub prime mortgages), a lack of decoupling of emerging markets such as China and India from the US and as mentioned before outright panic (human nature).

Half tempted to take a punt on James' tip but to be fair if there is no rate cut today I could still lose a fair wad of cash!

The 3 bank cut wasn't a "tip", it's a rumour! The Fed cutting by 50bps is more realistic but still only a rumour as well.

[Monk]

The 3 bank cut wasn't a "tip", it's a rumour! The Fed cutting by 50bps is more realistic but still only a rumour as well.

Top post sir.

You didn't get this rumour off 'football rumours' sister site 'market rumours' did you?

[Daggers]

So Daggers in answer to your question the problem lies in the fact that these mortgages have been defaulted on and are therefore worth nothing/impossible to value.

Yup, I knew/got all of that except - the bonds held were only worth a future potential value of a fully redeemed mortgage, or rather a revue stream, therefore they already had negligible value beyond that.

In the knowledge that property values increase over time, I still don't see how suddenly having a sleeve of properties instead of mortgages is a bad thing considering that rental values would cover the value of the mortgage being lost - if anything, it leaves the owners of these bonds with greater long term assets.

Here's where my misunderstanding stems from - maybe I am being too simplistic in my outlook but I'd stockpile the bonds if I had the ability to do so considering they are now as popular as a certain FT poster in a pre-School playgroup.

[The People's Hero]

Yup, I knew/got all of that except - the bonds held were only worth a future potential value of a fully redeemed mortgage, or rather a revue stream, therefore they already had negligible value beyond that.

In the knowledge that property values increase over time, I still don't see how suddenly having a sleeve of properties instead of mortgages is a bad thing considering that rental values would cover the value of the mortgage being lost - if anything, it leaves the owners of these bonds with greater long term assets.

Here's where my misunderstanding stems from - maybe I am being too simplistic in my outlook but I'd stockpile the bonds if I had the ability to do so considering they are now as popular as a certain FT poster in a pre-School playgroup.

[Daggers]

Well, that'll be this thread close, deleted and jumped on several times now then

[The People's Hero]

Well, that'll be this thread close, deleted and jumped on several times now then

It would have had a better chance of surviving if I hadn't posted in it.

I've been black-listed. It actually feels quite good.

[Daggers]

I've been black-listed. It actually feels quite good.

If you've got a black-list I wanna be on it

Waiting for the great leap forwards.

*to my knowledge this is the very first reference to Billy Bragg in General Chat in, like, ever. Yea me!*

[James.]

Yup, I knew/got all of that except - the bonds held were only worth a future potential value of a fully redeemed mortgage, or rather a revue stream, therefore they already had negligible value beyond that.

In the knowledge that property values increase over time, I still don't see how suddenly having a sleeve of properties instead of mortgages is a bad thing considering that rental values would cover the value of the mortgage being lost - if anything, it leaves the owners of these bonds with greater long term assets.

Here's where my misunderstanding stems from - maybe I am being too simplistic in my outlook but I'd stockpile the bonds if I had the ability to do so considering they are now as popular as a certain FT poster in a pre-School playgroup.

The problem is that these mortgages aren't just sitting on the books of the banks that offered them. They have been sliced and packaged up into complex derivative transactions and sold throughout the banking system.

Investment banks don't want a few hundred houses sitting on their book they just want exposure to the value of those houses (hence a derivative - its value being derived from the underlying). It's these derivative products which have lost their value and caused the pain, not the actual houses themselves.

You might want to read up on products like CDO's (collateralised debt obligations) and ABS's (asset backed securities) to get a better understanding of what I'm trying to explain. They are f**king complicated little bastards, that's for sure.

[The People's Hero]

Well, I'm gonna run amok for a while.

This time, when everything is deleted, I'm not going to kick off - that's what they want.

In fact, I'll pretend like I want it deleted so they feel like they've played in to my (grubby) hands.

Any other tried turning wood or pottery making?

[James.]

Fed cuts rates by 75 basis points. F**king hell, it just kicked off where I am!

[Daggers]

The problem is that these mortgages aren't just sitting on the books of the banks that offered them. They have been sliced and packaged up into complex derivative transactions and sold throughout the banking system.

Investment banks don't want a few hundred houses sitting on their book they just want exposure to the value of those houses (hence a derivative - its value being derived from the underlying). It's these derivative products which have lost their value and caused the pain, not the actual houses themselves.

You might want to read up on products like CDO's (collateralised debt obligations) and ABS's (asset backed securities) to get a better understanding of what I'm trying to explain. They are f**king complicated little bastards, that's for sure.

You've gone all bank-talk on me. We need to replace the underlying in the lounge apparently, the wife is on at me all the time.

So you are saying the bond owners do not own the property? That's all I need

Fed cuts rates by 75 basis points. F**king hell, it just kicked off where I am!

Which would be All-Bar-1 or some coffee emporium?

[Steven]

Fed cuts US rates by 3/4 of a percent or 75 basis points if you like.

[The People's Hero]

You've gone all bank-talk on me. We need to replace the underlying in the lounge apparently, the wife is on at me all the time.

So you are saying the bond owners do not own the property? That's all I need

Which would be All-Bar-1 or some coffee emporium?

Or a strip joint. I got taken to one one lunchtime by an insurance type and it was full of other insurance types, bankers and that type of person.

[Daggers]

Or a strip joint. I got taken to one one lunchtime by an insurance type and it was full of other insurance types, bankers and that type of person.

Not sure I'd like to watch bankers stripping while I am trying to neck a tuna sub, really.

[The People's Hero]

Not sure I'd like to watch bankers stripping while I am trying to neck a tuna sub, really.

To be fair, having seen some of the women, I'm not sure which would have been preferable.

At least I wasn't buying the beer though.

[Bellend Sebastian]

Fed cuts rates by 75 basis points. F**king hell, it just kicked off where I am!

This is great news. Guitars will be cheaper.

It's the old chestnut though isn't it? Will it be seen as the turning point, or a desperate measure to address an unstoppable malaise? I'm buggered if I know.

Who thinks the Dow will be up when it opens? I reckon it will go up a bit, then fall again.

[The People's Hero]

You think this malaise is bad, you should see how they're coping in Kuala Lumpar.

[Tommy G]

At the minute this is the most important topic on Foxestalk. Still can't get over the fact the Fed reserve have cut their interest rates by 0.75 %, pretty big news as nothing like this has really happened since 9/11

[James.]

At the minute this is the most important topic on Foxestalk. Still can't get over the fact the Fed reserve have cut their interest rates by 0.75 %, pretty big news as nothing like this has really happened since 9/11

First 75bps cut since 1993.

And yes the first emergency cut since 2001.

[Tommy G]

First 75bps cut since 1993.

And yes the first emergency cut since 2001.

But how will this have an effect on the UK and European Economies? Obviously any kind of economic decision spins off and effects Europe and the UK's economy, but surely nothing like this has happened historically to compare the effect with?

[James.]

But how will this have an effect on the UK and European Economies? Obviously any kind of economic decision spins off and effects Europe and the UK's economy, but surely nothing like this has happened historically to compare the effect with?

Although recent years have seen the emergence of the likes of China, India, Brazil and Russia as major economic forces the US still leads the way as the driving force of the global economy.

A cut such as this can be interpreted in a number of ways. It could be seen as an act of desperation to try and stimulate the US economy out of an inevtiable recession (which would damage economic growth elsewhere) or it could be seen as a significant pre emptive strike in the face of growing concerns. The stock markets have only reacted slightly to this news suggesting people are still very pessimistic about the overall outlook.

A US recession would damage the global economy. Europe and particularly Asia export a lot of goods and services to the US. These would fall if the US contracted due to a weaker dollar and also a reduction in investment (both domestic and foreign) by US businesses.

In terms of the whole situation (credit markets, sub prime, China, etc) you're right there is very little precedent. It's certainly a new era for global economics and more difficult than ever to predict.

[Tommy G]

Although recent years have seen the emergence of the likes of China, India, Brazil and Russia as major economic forces the US still leads the way as the driving force of the global economy.

A cut such as this can be interpreted in a number of ways. It could be seen as an act of desperation to try and stimulate the US economy out of an inevtiable recession (which would damage economic growth elsewhere) or it could be seen as a significant pre emptive strike in the face of growing concerns. The stock markets have only reacted slightly to this news suggesting people are still very pessimistic about the overall outlook.

A US recession would damage the global economy. Europe and particularly Asia export a lot of goods and services to the US. These would fall if the US contracted due to a weaker dollar and also a reduction in investment (both domestic and foreign) by US businesses.

In terms of the whole situation (credit markets, sub prime, China, etc) you're right there is very little precedent. It's certainly a new era for global economics and more difficult than ever to predict.

Exactly. Prediction is difficult, it is pretty safe to say that in 10/15 years time it would be very reasonable to suggest China, if not maybe India, will be leading Market forces, leaving Europe and America in their wake.

[Alexikokopops]

Wait a minute, I think I hear a foghorn...

BOOOOOOOOOOOOOOOOOOOOOOOOOOORING!