Can someone explain how banks taking a hit on sub-prime will cause a depression?

[ARCHIVED THREAD] - Can someone explain how banks taking a hit on sub-prime will cause a depression?

Posted: 10/8/2007 11:18:45 PM EDT

Can someone explain how banks taking a hit on sub-prime will cause a depression?

They'll STILL be making the "solid" backed commercial loans
they'll STILL be making the "solid" home, car and home improvement loans

And if it WILL, hold on, because sub-prime was a pretty good percentage of their paper

Posted: 10/8/2007 11:52:15 PM EDT

[#1]

The lenders sell "securities" based on income they will not receive. This means the buyer of the security is getting shorted because the actual assets are less than what they paid. And so on.

Posted: 10/8/2007 11:54:17 PM EDT

[#2]

Quoted:
The lenders sell "securities" based on income they will not receive. This means the buyer of the security is getting shorted because the actual assets are less than what they paid. And so on.

Seems like you're just saying that CD rates will go down

Posted: 10/9/2007 12:00:26 AM EDT

[#3]

Basically, the way I look at it, the banks and lending institutions don't make money on the interest, rather on the fees that charge the borrower.

The interest is paid to the organizations that put up the money. if you don't forsee you getting your money plus interest would put up money to lend to other people?

Posted: 10/9/2007 12:06:16 AM EDT

[#4]

A bank going bankrupt has far spreading ripple effects. They have a lot of IOU's that they are borrowing on. When a large number of the people you had lended large amounts of money too are no longer paying you, then you can not make your payments.

Basically it is the equivalent of the juggler dropping 1 of the 9 chainsaws on his foot.

Posted: 10/9/2007 12:16:01 AM EDT

[#5]

Quoted:
Basically, the way I look at it, the banks and lending institutions don't make money on the interest, rather on the fees that charge the borrower.

The interest is paid to the organizations that put up the money. if you don't forsee you getting your money plus interest would put up money to lend to other people?

I think that many of the lenders will still lend, just not as many, and maybe not as much

Posted: 10/9/2007 12:17:10 AM EDT

[#6]

Quoted:

Quoted:
Basically, the way I look at it, the banks and lending institutions don't make money on the interest, rather on the fees that charge the borrower.

The interest is paid to the organizations that put up the money. if you don't forsee you getting your money plus interest would put up money to lend to other people?

I think that many of the lenders will still lend, just not as many, and maybe not as much

Eventually they run out of pretend money to play the cup game with, and someone wants to be paid for real.

Posted: 10/9/2007 12:17:56 AM EDT

[#7]

Quoted:
A bank going bankrupt has far spreading ripple effects. They have a lot of IOU's that they are borrowing on. When a large number of the people you had lended large amounts of money too are no longer paying you, then you can not make your payments.

Basically it is the equivalent of the juggler dropping 1 of the 9 chainsaws on his foot.

Don't the banks usually sell their paper to investors?

Posted: 10/9/2007 12:21:05 AM EDT

[#8]

Quoted:

Quoted:
The lenders sell "securities" based on income they will not receive. This means the buyer of the security is getting shorted because the actual assets are less than what they paid. And so on.

Seems like you're just saying that CD rates will go down

For example: A small bank sells 10 mil in "securities" to a bigger bank based on what should be 15 mil of debt. The bigger bank sells 200 mil of "securities" to a mutual fund, of which many smaller banks have provided 10 mil. Then the small banks start finding out that the 15 mil they were counting on is looking more like 7 mil, but they are supposed to have at least 10 mil of assets. So the bigger bank is left with 200 mil of debt based on maybe 75 mil of assets. When the mutual fund finds out their 200 mil investment is really only worth 75 mil, does that make them happy?

Now multiply this by MANY more players.

Posted: 10/9/2007 12:22:44 AM EDT

[#9]

Quoted:

Quoted:
Basically, the way I look at it, the banks and lending institutions don't make money on the interest, rather on the fees that charge the borrower.

The interest is paid to the organizations that put up the money. if you don't forsee you getting your money plus interest would put up money to lend to other people?

I think that many of the lenders will still lend, just not as many, and maybe not as much

Eventually they run out of pretend money to play the cup game with, and someone wants to be paid for real.

Thank you. I ain't smart enough to explain it so simple.

Posted: 10/9/2007 12:23:29 AM EDT

[#10]

Quoted:

Quoted:
The lenders sell "securities" based on income they will not receive. This means the buyer of the security is getting shorted because the actual assets are less than what they paid. And so on.

Seems like you're just saying that CD rates will go down

For example: A small bank sells 10 mil in "securities" to a bigger bank based on what should be 15 mil of debt. The bigger bank sells 200 mil of "securities" to a mutual fund, of which many smaller banks have provided 10 mil. Then the small banks start finding out that the 15 mil they were counting on is looking more like 7 mil, but they are supposed to have at least 10 mil of assets. So the bigger bank is left with 200 mil of debt based on maybe 75 mil of assets. When the mutual fund finds out their 200 mil investment is really only worth 75 mil, does that make them happy?

Now multiply this by MANY more players.

Hmmm.......I'm not clear on how sub-prime interacts with the mutual fund market

Maybe that is the part I'm not seeing

When you say "securities" you mean paper, right? (outstanding loans)

Posted: 10/9/2007 12:24:54 AM EDT

[#11]

Sometimes loans are packaged into "collateralized loan obligations", and sold as asset-backed securities. If they were flaky loans, the investors, mutual funds, or whoever bought the securities could lose out.

That & similar "creative" securities are why I'm looking hard at my money market fund. Methinks such funds may not be as safe as they are claimed.

Posted: 10/9/2007 12:26:02 AM EDT

[#12]

You miss the underlying cause of everything economic. It worls because we think it works. And think it will continue to work. Shake confinence in that too much and it stops working.

That siad, I don't think this is that.

Posted: 10/9/2007 12:28:14 AM EDT

[#13]

Quoted:

Quoted:
A bank going bankrupt has far spreading ripple effects. They have a lot of IOU's that they are borrowing on. When a large number of the people you had lended large amounts of money too are no longer paying you, then you can not make your payments.

Basically it is the equivalent of the juggler dropping 1 of the 9 chainsaws on his foot.

Don't the banks usually sell their paper to investors?

Yeah, but if they are not receiving payments on their investments (interest on your loan) then they are worthless. The problem is not a couple of bad borrowers, it was the fact that there were so many and they had so much money lended to them. Since it happened to fast, and the market became flooded with new and very expensive homes, the real estate price dropped, and people lost money.

I read an example of a couple who qualified for a $730K loan and they only made $400 a week.

What sparked everyone not being able to make payments was a little bump up in interest rates, by the devalueing dollar (little help by higher gas prices too). Interest rates are not that high, but they went up enough for people that were skimming by on the Adjustable Rate Mortgages (ARM) that it was the straw that broke the camels back.

Posted: 10/9/2007 12:30:12 AM EDT

[#14]

Quoted:
You miss the underlying cause of everything economic. It worls because we think it works. And think it will continue to work. Shake confinence in that too much and it stops working.

That siad, I don't think this is that.

I understand the "confidence=value" aspect of the equation
just not the part where the banks lower profit drag us into a
depression. Yeah, stocks take a hit, accounts\CDs are insured

Posted: 10/9/2007 12:36:15 AM EDT

[#15]

Quoted:

Quoted:
You miss the underlying cause of everything economic. It worls because we think it works. And think it will continue to work. Shake confinence in that too much and it stops working.

That siad, I don't think this is that.

I understand the "confidence=value" aspect of the equation
just not the part where the banks lower profit drag us into a
depression. Yeah, stocks take a hit, accounts\CDs are insured

Banks earn their money by investing it in the stock market.

Lets say they loan you $100, and from a year of interest you will eventually pay the bank $200.

Well the bank takes the $200 that they will eventually earn from you in a year, and invest it immediately in stocks, by using your loan as collateral to borrow $1000. If you stop making payments, then the bank cannot make payments because they have not gotten the returns on their investments yet to pay back their lenders.

ETA: With banks not having the funds to invest in the stock market, the prices goes down and everybody jumps ship. Creating more liquidity (more money floating around and not being invested in things) this devalues the dollar and raises interests rates, which makes it even harder for people in debt to pay their bills.

Posted: 10/9/2007 12:36:29 AM EDT

[#16]

Quoted:

Quoted:
A bank going bankrupt has far spreading ripple effects. They have a lot of IOU's that they are borrowing on. When a large number of the people you had lended large amounts of money too are no longer paying you, then you can not make your payments.

Basically it is the equivalent of the juggler dropping 1 of the 9 chainsaws on his foot.

Don't the banks usually sell their paper to investors?

Yeah, but if they are not receiving payments on their investments (interest on your loan) then they are worthless. The problem is not a couple of bad borrowers, it was the fact that there were so many and they had so much money lended to them. Since it happened to fast, and the market became flooded with new and very expensive homes, the real estate price dropped, and people lost money.

I read an example of a couple who qualified for a $730K loan and they only made $400 a week.

What sparked everyone not being able to make payments was a little bump up in interest rates, by the devalueing dollar (little help by higher gas prices too). Interest rates are not that high, but they went up enough for people that were skimming by on the Adjustable Rate Mortgages (ARM) that it was the straw that broke the camels back.

Well, the housing "aspect" will cost a lot of people dearly, just like the .com bust did

I thought banks were like insurance companies
another one will always buy the assets of one
that can't survive, very few just close their doors

Posted: 10/9/2007 12:40:13 AM EDT

[#17]

Eventually they run out of pretend money to play the cup game with, and someone wants to be paid for real.

Numbers this big vary from source to source, but I read one article that said world-wide there is 465 trillion "debt" and 60 trillion "assets". I'm sure those numbers aren't "real", but it gives you an idea.

Posted: 10/9/2007 12:40:49 AM EDT

[#18]

Eventually they run out of pretend money to play the cup game with, and someone wants to be paid for real.

Google the phrase "fractionl reserve system" and research,
you'll quickly learn the house of cards is falling. Just because
you have, for example, $1000 deposited in your bank doesnt
mean the bank has the entire $1000 in cash on hand if you attempt to withdraw
those funds during a run on banks if everyone else does the same thing at once.
Sure it might be FDIC insured, but in an emergency the fed can restrict withdraw
frequency and amount. The subprime loan issue, rapid devaluation of the dollar,
higher cost of living for food, oil, and skyrocketing national debt, etc are all issues hurting our country right now.

uk.youtube.com/watch?v=25_APRkrXeY

Boring but more detailed info:
uk.youtube.com/watch?v=KIgrxpp97OQ

Posted: 10/9/2007 12:42:51 AM EDT

[#19]

Quoted:

Quoted:
You miss the underlying cause of everything economic. It worls because we think it works. And think it will continue to work. Shake confinence in that too much and it stops working.

That siad, I don't think this is that.

I understand the "confidence=value" aspect of the equation
just not the part where the banks lower profit drag us into a
depression. Yeah, stocks take a hit, accounts\CDs are insured

Well yeah, other banks will buy up their debts on small scales. But when it is the #2 mortgage lender in the country that is biting the dust, it is pretty safe to say other banks are having the same problem, not to mention the debt they are buying up is that of dead beats, so you are not likely to get anything for your money.

Posted: 10/9/2007 12:46:38 AM EDT

[#20]

Quoted:

Eventually they run out of pretend money to play the cup game with, and someone wants to be paid for real.

Numbers this big vary from source to source, but I read one article that said world-wide there is 465 trillion "debt" and 60 trillion "assets". I'm sure those numbers aren't "real", but it gives you an idea.

Yes, that is what is happening to the US. We are not able to pay back our debts when they are being called in, so we have to resort to selling off utilities and natural resources.

ETA: sorry for double post, I thought someone had already replied

Posted: 10/9/2007 12:51:13 AM EDT

[#21]

Quoted:

Quoted:
You miss the underlying cause of everything economic. It worls because we think it works. And think it will continue to work. Shake confinence in that too much and it stops working.

That siad, I don't think this is that.

I understand the "confidence=value" aspect of the equation
just not the part where the banks lower profit drag us into a
depression. Yeah, stocks take a hit, accounts\CDs are insured

Well yeah, other banks will buy up their debts on small scales. But when it is the #2 mortgage lender in the country that is biting the dust, it is pretty safe to say other banks are having the same problem, not to mention the debt they are buying up is that of dead beats, so you are not likely to get anything for your money.

They have the assets(houses)but they might wind up getting out with 50% overall
(and it is not just the #2 company, sub-prime was looked at as an "opportunity")

I'll chew over what I've gotten tonight and see if I can "see" the connection better

Posted: 10/9/2007 12:55:59 AM EDT

[#22]

Quoted:

Quoted:
You miss the underlying cause of everything economic. It worls because we think it works. And think it will continue to work. Shake confinence in that too much and it stops working.

That siad, I don't think this is that.

I understand the "confidence=value" aspect of the equation
just not the part where the banks lower profit drag us into a
depression. Yeah, stocks take a hit, accounts\CDs are insured

Well yeah, other banks will buy up their debts on small scales. But when it is the #2 mortgage lender in the country that is biting the dust, it is pretty safe to say other banks are having the same problem, not to mention the debt they are buying up is that of dead beats, so you are not likely to get anything for your money.

They have the assets(houses)but they might wind up getting out with 50% overall
(and it is not just the #2 company, sub-prime was looked at as an "opportunity")

I'll chew over what I've gotten tonight and see if I can "see" the connection better

They would get back some of their money yes, if the bank were able to sell the houses. But people are not buying because interest rates are creeping up, and they cannot get any money for the house they are currently in. You are currently renting, now would be a good time to look into purchaseing a home.

Not to mention banks are leary of loaning right now, and their money has gone to other places in order to attempt to hedge against the losses in subprime.

Posted: 10/9/2007 12:58:25 AM EDT

[#23]

Quoted:

Quoted:
You miss the underlying cause of everything economic. It worls because we think it works. And think it will continue to work. Shake confinence in that too much and it stops working.

That siad, I don't think this is that.

I understand the "confidence=value" aspect of the equation
just not the part where the banks lower profit drag us into a
depression. Yeah, stocks take a hit, accounts\CDs are insured

Well yeah, other banks will buy up their debts on small scales. But when it is the #2 mortgage lender in the country that is biting the dust, it is pretty safe to say other banks are having the same problem, not to mention the debt they are buying up is that of dead beats, so you are not likely to get anything for your money.

They have the assets(houses)but they might wind up getting out with 50% overall
(and it is not just the #2 company, sub-prime was looked at as an "opportunity")

I'll chew over what I've gotten tonight and see if I can "see" the connection better

They would get back some of their money yes, if the bank were able to sell the houses. But people are not buying because interest rates are creeping up, and they cannot get any money for the house they are currently in. You are currently renting, now would be a good time to look into purchaseing a home.

Not to mention banks are leary of loaning right now, and their money has gone to other places in order to attempt to hedge against the losses in subprime.

Home prices will go down, banks WILL continue to loan money to buy them
although, it will be at higher rates and with more strict credit requirements

[ARCHIVED THREAD] - Can someone explain how banks taking a hit on sub-prime will cause a depression?

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