Friday was more of the Rich Man's Panic. This time it was more hedge funds and the piranhas at Bear Stearns. Hedge funds are getting redemptions from their rich investors who aren't so enthralled now and fear losing money. Gee, maybe they'll be embarrassed at the country club.
The bears want for panic and are planting news stories to create more confusion and fear. They never seem to get past shouting "subprime!!!!"
What are the facts?
1. The yield on intermediate grade bonds ... fell 13 bps. [Barron's, page M52].
2. A real loan to a real company gets ... oversubscribed. [WSJ, August 4-5, page A4 re Imperial Tobacco. "High demand"
3. Prime mortgage delinquencies [90+ days] are ... flatish for both variable rate and fixed rate. [WSJ, August 3, from the chart page C1]
4. Credit card delinquencies are ... flatish. [Same source as #3].
5. Subprime fixed rate mortgage loan delinquencies [90+ days] are ... flatish [same source as #3]
6. Auto loan delinquencies [90+ days] direct with banks are ... flatish. [ditto re source]
7. Auto loan delinquencies [90+ days] through dealers are ... up slightly. [ditto re source]
8. Subprime variable rate mortgage loan delinquencies [90+ days] are up substantially.
We know that corporate and commerical mortgage loan defaults are still at historically low rates.
So this is all a subprime mortgage variable rate loan problem. Hedge funds provided funding for unscrupulous lenders who, following Greenspans advice, took out variable rate loans at a time when variable rates were historically low. The mortgage brokers & bankers sucked out their fees and the hedge fund managers did the same.
Now the low income borrowers are stuck and can't refinance, even if they have a job and income since the "lenders" are changing the terms and loan to value levels.
This is a problem with permitting non-banks like hedge funds to play being banks. I wrote in another forum how hedge funds were trouble and were going to cause a big problem. I said that if they want to be banks they should get regulated like banks. Some challenged my thinking, saying whoever got hurt? What problem except LTCM ever occurred? How would normal people ever get affected? Hedge funds are good, they said, by bringing "liquidity" to markets. Now we see the dark side of their antics. I was right then and we are seeing the cost of letting them play "bank".
Low income people might lose their homes because they were scammed by mortgage brokers and bankers funded by hedge funds. Sure, they were stupid and made a dumb financial decision. The victim of a bunko scam IS stupid or greedy. But bunko and fraud ARE illegal. The "Truth-in-Lending Law does exist. And the Fed or other responsible agencies should regulate hedge funds playing banks.
Derivatives re another post. These stacked derivatives are really garbage, too. As are the collateral rules. That needs to be regulated so dumping the collateral doesn't create problems in other markets and sufficient collateral and capital requirements need to be imposed.
PS: Here's another flaw in the "This will spread" claim. Since when has this economy been propelled or driven by low income people? For years it has been the upper middle income and rich who are doing the spending and investing. All the retail data for years has shown that and that has been widely recognized. So how is this pain for a slice of lower income people going to destroy the world's growth?