Word: defaults
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...fine print; middle-men selling mortgage debt to investment banks sliced and diced into "tranches" that obscure their riskiness; bankers who used hard-to-fathom financial instruments that leave ultimate responsibility for a loan a mystery even to experts. Like many observers, Levine is particularly exercized about credit default swaps, a largely unregulated field since 2000.) And anyone who willfully ignored the fact that real estate prices must eventually come down...
...amazes me that nobody seems to have asked the simple question, "What will happen to banks and other financial institutions if a large number of subprime loans default?" Or was it only greed that made everyone ignore the disaster that would occur if the markets went south? Frederik Steenbuch, Oslo...
...across the country. Consumer lending contracted last month--that's practically un-American. Car dealers may fold by the hundreds, as customers can't get credit to buy and manufacturers won't finance dealer inventories. Holiday-shopping forecasts are getting bleaker. Declining home values mean more homeowners could default, further driving down property values. All that crimps tax revenues, and states such as Pennsylvania and New York are now trying to plug gaping holes in their budgets, while California is looking for $7 billion from Washington in part to make payroll, since short-term borrowing is unavailable...
...thing that has him spooked is the price of credit-default swaps for major U.S. banks - a derivative that provides insurance against the possibility that they might default on their debt, dooming them to bankruptcy. According to data provided by Bloomberg using a model devised by JP Morgan, the price of this insurance currently implies that the odds of banking giant Morgan Stanley defaulting in the next five years are 45%. For Citigroup, another financial linchpin, they're 21%. "This is astonishing," says Weiss. "If Citigroup fails, it could be disastrous...
...Weiss believes these banks are far less likely to run aground than the panic-induced price of credit-default swaps would suggest. But since the demise of Bear Stearns and Lehman Brothers, "people have no idea how sound banks are," he says, so "the whole financial system is locking up." The U.S. government's rescue plan should help, and Weiss thinks there's a fair chance that the busted assets it's buying to prop up the system will rise sharply in value as everything stabilizes. But he's by no means confident that the $700 billion bet will...