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The truths they don't want you to read....

Friday, August 10, 2007

Impending financial crisis?

For some time I have been concerned that the whole economy was on a shoogly nail, as I though consumer credit was running rampant and out of control, resulting in excessive borrowings and insane house price growth. Indeed, I have been advocating a return to cash ahead of the slump, on the basis of the deals becoming more outrageous, and greed - rather than common sense - making the running in the markets.

I was beginning to think I might be wrong, when the Robert Preston financial blog caught my eye and made some comments on the sub-prime market in the US...

I am a long way from a properly functioning computer screen. But thanks to the miracle of mobile telephony I have been able to read BNP Paribas's explanation for prohibiting investors from cashing in more than a billion pounds of funds linked to the US subprime market.

BNP's statement is scary, to put it mildly. The giant French bank says that it cannot value the assets in these funds due to the "complete evaporation of liquidity in certain market segments of the US securitization market".

The terrifying bit is not BNP's citing of the disappearance of two-way trade in bonds and derivatives linked to poor quality US home loans, or what it calls the "evaporation of liquidity". That's just a statement of the obvious, bad news we've known about for some weeks.

No. What gives the game away is that BNP, the pride of France and one of Europe's biggest banks, doesn't dare take the long view and offer to buy these illiquid investments from investors who want to sell.

The sub-prime market is not just in melt-down, but it is starting to drag down other financial institutions with it. What matters in financial markets is confidence. One that goes, the game is over. In this case, BNP are saying that they cannot value an investment - not even at a fire-sale price - and they are having to stop people trying to redeem their own investments as a consequence.


Anonymous said...

Well with your trade I guess you have a handle on that. Thanks for putting it all in lay terms.
I don't know much about money, haven't got much but then don't owe much. Seems to me that the economy of the UK is 'healthy' due to people running round with fistfuls of credit cards.
Would you go with that?

Angus said...

Yes. Borrowing was sold to the public as a virtue in every circumstance.

There are circumstances in which it is good to borrow; but borrowing to fund current expenditure, or borrowing beyond that which you cannot repay is just insane.

That is who the crunch will really hurt.