The Banking and Strategy Initiative

Chillin' out till it needs to be funded

Meltdown

Asked by Jean Justimbaste

The property market was allowed to run uncontrolled with dubious investors using it as employment treating the purchase infact as an option wherein in case the property value fell, they could just stop making payments on it and thence trigger greater bankruptcies. Short sellers went for FTD sells once the values were looking easy profit for them and because the correction came as a vertical cliff in the end , it was a breakdown across all market formats which depended on the piece of property dropping in value. Also, the ABS securities were mostly insure by CDS (Default Swaps) which were not honoured when the actual ABS securities’ values dropped out of sight. Asset backed Securities not backed by adequate collateral were available in the market and neither the AIGs paid the defaulted “insurance” holders nor they finally could pay themselves. It’s no use blaming the hedge funds because it is for the regulators to be available for corrective action at each such step of the crisis rather than just showing up at the end. Banks buying today just waited for this valuation game to bottom out before they invested and the resultant credit squeeze is today on everyone’s plate because oversight has to be regular and consistently demanding and exact, not at the whim and fancy of the politicians and the Fed. When each covenant is signed whether for mortgages or for the ABS, there should be someone making sure that each such covenant has terms and conditions which do not make execution and pay out impossible in extreme conditions and that adequate capital is always available. Discovering that 20-30 times leverage does not work cannot be an overnight phenomenon.”

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One comment on “Meltdown

  1. zyakaira
    July 26, 2009

    RELATED QUESTION

    Rescuing Banks – Necessity or baulking free market enterprise?

    In my latest blog article http://calxeurope.blogspot.com/2008/09/banking-rescues-necessity-or-baulking.html I look at the rescues and mergers resulting from the crisis in the banking sector and ask what about free market enterprise and competition? As companies get a life boat or not as the case may be, why are we tearing up the rules on anti-competition?

    I think, it tells me that this hole is really big. The 700 billion of TARP for example is just 5% when the deterioration in value is more than 60% in the mortgage market, not counting the defaults at all. And, also this amount is already 85% of your cash reserves. Money is man’s invention and this one event can wipe out this invention in its entirety, probably. and thanks to market forces, only the public institutions and one Lehman needed real help. the rest of the banks are really small ticket items, and retail depositors being kep happy is always important. I think if Paulson from Goldman Sachs thinks it is necessary – it very much is.

    Like

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