Skip to main content

Subprime shakeout: questions loom

As the subprime mortgage shakeout continues to ripple through the markets, FT Alphaville looks at two different elements of this story: the macroeconomic perspective, and the contagion effects made possible by financial innovation.

As was pointed out
in these pixels on Wednesday, there are two elements to the subprime mortgage shakeout in the US.

The first, macroeconomic, concerns the extent to which the woes in the subprime sector of the mortgage market spill over into the broader US housing market, and spark a slowdown in overall consumer spending.

The second is a question regarding financial innovation, which has created transmission mechanisms across the wider credit markets, whereby problems can leap between seemingly unrelated markets such as US mortgages and European leveraged loans, which are funding the current buy-out boom.

As Paul J Davies wrote here yesterday: “if contagion between markets is fueled by such mechanisms then the sell-off in credit could be the harbinger for a much broader systemic sell-off of risk across all asset classes - that at least is the most bearish, apocalyptic version of current market concerns.”

The Alphaville post goes on to survey reactions to the subprime fallout from various bloggers and market analysts. While some are expressing little surprise over the current state of things, others are busy making a case for "containment".

But as S&P and Moody's move to cut their ratings on mortgage backed securities (the very securities which they often trumpeted as investment grade), worries over the extent of the damage continues to mount.

Still, there is no time better than the present for some good old-fashioned spin. So with that in mind, let's take a quick look at how the "well-contained" subprime mortgage fiasco has affected investors in other areas of the market.

Minyanville writer Kevin Depew has been chronicling the way in which the subprime "containment has been spreading" for some time, now. Here's a look back at the growing problems in the debt markets from late April, in which Depew observes that a "behavioral contagion" of fear might cause a panic to spread through other portions of the debt markets. Lots of amusing commentary here.

My favorite of all the "containment" statements heard so far (and I'm only a casual observer) is this quote from a recent article that appeared in The Economic Times:

“Risk aversion appears to be mainly contained within credit markets."

The best part about this line is that it's taken from an article entitled, "Subprime woes spread to stocks and dollar". Think about that one for a minute...

For more background perspective on the subprime and mortgage-backed securities market, see our recent roundup entitled, "Not another subprime post?!".

Popular posts from this blog

Seth Klarman: Margin of Safety (pdf)

Welcome, readers! Signup for free email updates at the Finance Trends Newsletter . Update: PDF links removed due to DMCA notice. Please see our extensive Klarman book notes below. New visitors, please check the Finance Trends home page for all new posts. Here's something for anyone who has been trying to get a look at Seth Klarman's now famous, and out of print, 1991 investment book, Margin of Safety .  My knowledge of value investing is pretty much limited to what I've read in Ben Graham's The Intelligent Investor (the book which originally popularized the investment concept of a "Margin of Safety"), so check out the wisdom from Seth Klarman and other investing greats in our related posts below. You can also go straight to Ronald Redfield's Margin of Safety book notes .    Related posts: 1. Seth Klarman interviews and Margin of Safety notes     2. Seth Klarman: Lessons from 2008 3. Investing Lessons from Sir John Templeton 4.

Moneyball: How the Red Sox Win Championships

Welcome, readers . T o get the first look at brand new posts (like the following piece) and to receive our exclusive email list updates, please subscribe to the Finance Trends Newsletter .   The Boston Red Sox won their fourth World Series title of t he 21st century this we ek. Having won their first Se ries in 86 years back in 200 4, the last decade-plus has marked a very strong return to form for one of baseball's oldest big league clubs. So how did they do it? Quick background: in late 2002, team own er and hedge fund manager, John W. Henry (with his partners ) bought the Boston Red Sox and its historic Fenway Park for a reported sum of $ 695 million. Henry and Co. quickly set out to find their ideal General Manager (GM) to help turn around their newly acquired, ailing ship. This brings us to one of my fav orite scenes from the 2011 film , Moneyball , in which John W. Henry (played by Ar liss Howard) attempts to woo Oakland A's GM Billy Beane (Brad Pi

William O'Neil Interview: How to Buy Winning Stocks

Investor's B usiness Daily founder and veteran stock trader, William O'Neil share d his trading methods and insights on buying winning stocks in an in-depth IBD radio interview. Here are some highlights from William O'Neil's interview with IBD: William O'Neil's interest in the stock market began when he started working as a young adult.  "I say many times that I didn't get that much out of college. I didn't have much interest in the stock market until I graduated from college. When I got married, I had to look out into the future and get more serious. The investment world had some appeal and that's when I started studying it. I became a stock broker after I got out of the Air Force."    He moved to Los Angeles and started work in a stock broker's office with twenty other guys. When their phone leads from ads didn't pan out, O'Neil would take the leads and drive down to visit the prospective customers in person.