thats true - the keynesians are trying to solve the credit crunch by pumping in more money, despite the fact that excess liquidity was one of the problems that cause the crunch to start with - i agree with the monetarists - inflation is going nowhere but up up up.
Credit Crunch
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thats true - the keynesians are trying to solve the credit crunch by pumping in more money, despite the fact that excess liquidity was one of the problems that cause the crunch to start with - i agree with the monetarists - inflation is going nowhere but up up up.
Soldato
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I doubt it... but if they do then it's all the more reason to do other things with your money (stocks/bonds/etc.) and probably earn above the interest rate at the same time...
Then one bank doesn't charge and everyone in the country switches to them....
It's not going to happen.
Ah well, I was one month early with my prediction!
http://forums.overclockers.co.uk/showpost.php?p=10714907&postcount=106
Actually, for banks who have been hit badly, declaring everything now will work in their favour - shareholders, investors, speculators, etc. will think "this is the end of it for XXX now" will result in them believing the stock has 'bottomed out' leading to buying --> rising share price.
Evidence: Citi, UBS share prices rose when they announced writedowns recently.
Since Citi have written down $40.7bn and UBS some $38bn, shareholders rightly expect it to be the end of it for them!
Keynesians don't pump in more money to solve credit crunches. They prefer to use expansionary fiscal policy to raise aggregate demand to achieve the full employment level (note: full employment does not mean everyone works, but that everyone in the labour force works).
Excess liquidity wasn't a cause of the credit crunch, it was overzealous lending to households with poor credit at a time when interbank interest rates were low. Then they rose and since the mortgages were ABR, repayments couldn't be afforded. Liquidity was fairly normal, it was just the interest rate that was low.
When the crunch happened, the banks lending in the short-term LIBOR market dried up. They had little cashflow and wanted to hold onto their money. Banks couldn't borrow from each other, so they couldn't lend to households and firms. This is a constraint on investment which the economy can do without. Supply of funds down, interest rate up. Thus, the MPC cuts interest rates and the Bank of England offers more money at the 'discount lending rate' to banks to offer them a lifeline if they need to borrow.
Regarding inflation, it doesn't help that oil prices are skyrocketing. Nevertheless, we're better off than the EU and USA at the moment.
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Could someone please explain what the definition of a loss is, as I'm sure some of the figures reported by the banks are a bit disingenuous.
Lets say I borrow 100 pounds from a bank over a period of 10 years. The bank then calculates that it will bring in 200 pounds over the term of the loan. If after 5 years I default on the loan, but have paid back 130 pounds, has the bank made a loss. This is a genuine question.
I would say the bank has recovered the original loan and some additional money. Hence no loss (excluding operating costs, but I'm trying to keep the example simple). But you could argue that the bank had planned to make 100 pounds profit and has used this figure in its forcasts. So it has infact made a 70 pound loss!
Does anyone know how these huge losses are actually calculated? It all seems a bit suspect to me.
Lets say I borrow 100 pounds from a bank over a period of 10 years. The bank then calculates that it will bring in 200 pounds over the term of the loan. If after 5 years I default on the loan, but have paid back 130 pounds, has the bank made a loss. This is a genuine question.
I would say the bank has recovered the original loan and some additional money. Hence no loss (excluding operating costs, but I'm trying to keep the example simple). But you could argue that the bank had planned to make 100 pounds profit and has used this figure in its forcasts. So it has infact made a 70 pound loss!
Does anyone know how these huge losses are actually calculated? It all seems a bit suspect to me.
Where's the guarantee that it's the end though?
Just because they've announced more than others doesn't mean that they don't have a lot more to come.
You borrow £100 from your bank, as do 100 other people, totalling £10,000. The bank packages them up into 10 £1,000 packages and sells them on to other banks with the return being made on the mortgage repayments you make.
So bank A sold to bank B. Now you default on your pament because you don't have enough money, the value of your house has dropped 25% ( as in some areas in the US). Bank B writes off 30% of its purchase, from £1,000 to £700. This is due to lack of repayment of principal and servicing of the debt.
The 30% is an estimate because banks have bought packages of mortgages so they take into account default rates, property values etc. Some of the banks might eventually find that they have written off too much, but valuation of an investment is based on the current market value. If there is no current market value because no-one wants to trade, how do you value it? If you go back to a quant model then your valuation and ultimately your writedowns are going to be based on key assumptions.
To aardvark, the credit derivative market might be the size that you are claiming, but I don't know how you can make it out to all be mortgages and potential losses being so large as its not all junk debt? There is a fixed size of the US housing market which is taking a hammering because of the no principal, low repayment mortgages which caused the crunch. With the market assuming that a majority of the writedowns now done, you're standing out on a bit of a limb saying that you think future writedowns could be 4 - 20 times larger? If you are saying $5 trillion is a conservative estimate, which is 20 times larger than the current writedowns, then keeping everything proportionally the same, UBSs' writedown should increase by 20 times. As they have written off almost $40bn, I am a little sceptical about your 'conservative' estimate that they will write off another $800bn (20 * 40bn). By my estimate, their current total assets as at December 31st 2007 were roughly CHF 2,272 billion, or $2,163 billion. That would be quite the chunk of their total assets. Even if we halved this conservative estimate to 10times, so $400bn. I doubt that UBS had 20% of its total assets in CDO/MBSs. Especially as I would have thought bank regulations would not allow this.
And as regards the banks not wanting to price their assets, you can't price something that doesn't have a market price. Banks have to price their assets to a market value when they present their annual statements, as UBS did on 31st December. This 'banks don't want to so don't' idea doesn't really work.
my 2 cents...
So bank A sold to bank B. Now you default on your pament because you don't have enough money, the value of your house has dropped 25% ( as in some areas in the US). Bank B writes off 30% of its purchase, from £1,000 to £700. This is due to lack of repayment of principal and servicing of the debt.
The 30% is an estimate because banks have bought packages of mortgages so they take into account default rates, property values etc. Some of the banks might eventually find that they have written off too much, but valuation of an investment is based on the current market value. If there is no current market value because no-one wants to trade, how do you value it? If you go back to a quant model then your valuation and ultimately your writedowns are going to be based on key assumptions.
To aardvark, the credit derivative market might be the size that you are claiming, but I don't know how you can make it out to all be mortgages and potential losses being so large as its not all junk debt? There is a fixed size of the US housing market which is taking a hammering because of the no principal, low repayment mortgages which caused the crunch. With the market assuming that a majority of the writedowns now done, you're standing out on a bit of a limb saying that you think future writedowns could be 4 - 20 times larger? If you are saying $5 trillion is a conservative estimate, which is 20 times larger than the current writedowns, then keeping everything proportionally the same, UBSs' writedown should increase by 20 times. As they have written off almost $40bn, I am a little sceptical about your 'conservative' estimate that they will write off another $800bn (20 * 40bn). By my estimate, their current total assets as at December 31st 2007 were roughly CHF 2,272 billion, or $2,163 billion. That would be quite the chunk of their total assets. Even if we halved this conservative estimate to 10times, so $400bn. I doubt that UBS had 20% of its total assets in CDO/MBSs. Especially as I would have thought bank regulations would not allow this.
And as regards the banks not wanting to price their assets, you can't price something that doesn't have a market price. Banks have to price their assets to a market value when they present their annual statements, as UBS did on 31st December. This 'banks don't want to so don't' idea doesn't really work.
my 2 cents...
The distinction between losses incurred directly from 'bad debts' and indirectly through the depreciation in value of Collateralised Debt Obligations (CDOs) and Asset/Mortgage Backed Securities (ABS, MBS) needs to be made.
These massive losses you're hearing about have a lot to do with these financial products these banks bought. A couple of years ago, they thought it was a good idea to buy 'trenches' (i.e. packages of similar mortgages) from other banks. It aids the other bank's cash flow to sell on 'loans' and the buying bank gets payments on the CDO.
Then interbank interest rates went on a flight. Then subprime households couldn't repay their mortgages in USA. Then these CDOs effectively became worthless because the holder doesn't get any payment! The value of these CDOs plummeted. Banks holding these CDOs therefore saw a depreciation in value of their 'position'. Some of them built up massive positions on these products. Goldman Sachs built it up the other way round - they sold them
.The writedowns you hear about are primarily to do with the value of these CDOs falling. As the poster before me said, when they reveal writedowns, they need to be done at market value. The market has crumpled so it's difficult to even know. I've heard that 60-70% writeoff on these CDOs is normal.
Important point: there are actually 'good' CDOs too. Some 'trenches' aren't all bad and they haven't been affected as much. However, the bulk was the dodgy ones.
Losses from bad debt happen all the time. Banks know this will happen and factor it in. It is the collapse of CDOs, which are 'financial derivatives' which plummeted.
There's no guarantee. Even they don't know really how much is left, but they've had a damn good go at finding out because it is in their best interest now to 'move on'. Banks like Citi and UBS have nothing to gain from beating around the bush anymore. They've lost their chief execs, culled the staff, become part-owned by the Middle-East and Asia and have publicly humiliated themselves. They are now rebuilding.
I didn't say it was over; I was referring to the fact that banks like Citi, UBS have seen the worst and are now focused on rebuilding rather than side-stepping writedowns.
Could always take into account the 250bps decrease in the fed funds rate between August and now. There is still 4 months to go, and who knows what measures the fed could implement between now and then. Its not in the best interest of the bank to have millions of more defaults. Would you rather work out a deal to get some repayments or seize the property and take a 40% hit.
If the base rate has more than halved and the mortgage rate is still going to double then something isn't adding up surely.
the central banks have lost control of the interest rate market - they are cutting but the lenders are increasing. As for the other banks, they are not charities and need a constant cash flow - if you can't keep up with the repayments your house will be repossessed - that's what the small print says - a 40% hit is better than a 100% hit.
Going to try and keep this fairly straight forward so this post isn't entirely accurate but you've basically got the right idea - treasury departments in banks will closely monitor their overall liquidity risk figures out to about 25 years or so and (depending on their views on inflation/interest rates) will look to keep their books balanced.
Remember with banks your loan is their asset and your deposit is their debt. The fact that they've lent you 100 pounds over x years will increase their assets - they'll take into account the future cashflows on all loans & lots of other instruments when looking at their liquidity risk and will roughly try to keep it balanced - i.e. if they've made lots of loans they'd also want to take on more deposits. The fact that you've defaulted on the loan will cause them a loss.
Northern rock had far too many long term assets and when the cost of borrowing went up it couldn't balance the books via the interbank market thus had a liquidity crisis.
UK Mortgage debt is over one trillion pounds.
Of course I suspect that the majority of the written off debts aren't actually specifically related to UK mortgages in any event, but rather debts from North American arms.
The big banks never loose out, as if you default and they take the asset, they are actually getting something real for what is just digits on a computer. Eventually the few at the top will own everything, through consolidation.
yes but its an expensive and inefficient process and if house prices drop in general then they might not cover the whole cost of the loan