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Subprime
and reform
Nervousness associated with the slowdown in the economy and problems in the
state sector housing credit was observed from the beginning of the year. The
main reason for unrest represented by the securities that are secured by subprime
loans: Subprime - this mortgage loans to borrowers with bad credit history. As
long as the price of housing in the United States grew from borrowers has not
been difficulties in the payment of loans: any monetary constraints can be
solved by Bad Credit Mortgage or taking additional money under its own, the pricerises, house. When prices began to fall, began late payments and defaulted on
the mortgage. As a result, since the beginning of the year several dozen such
companies (to date more than 90) have declared bankruptcy.
Seriously fever in the beginning of June and July: Two hedge fund, managed by
Bear Stearns first announced the problems, and then does nakrylis. Direct bear
the risk, of course, the investors funds, but Bear Stearns is not good.
Promotions company collapsed, to prevent Mortgages assets Bear was forced toissue a loan to fund 1.6 billion
Bear Stearns Funds invested almost all their money in notes (bonds), secured
Subprime mortgages. In doing so themselves assets of these funds were not too
risky - the problem was that investments made with a large shoulder (that is,
in effect, on borrowed money). Here, perhaps, needed clarification.
1) How to invest in Subprime may not be very risky? Very simple. Suppose that a
bank bought X portfolio of risky mortgage bonds - at 1 billion. He went
perepakoval risk mortgages follows:
a. Class A notes issued at 100 million with a very high coupon (for simplicity,
let's say, 20%) and the conditions that those first notes bear the risk of defaults
on mortgages. Obviously, the default with only 10% of mortgages portfolio
holders of such notes lose all their Bad Credit.
b. Class B notes issued another 200 million with a lower coupon (for simplicity
will let 11%) and the condition that these notes bore the risk of default on Mortgages that exceed 10% (that is, their losses will not be covered holders of Class A notes ).
c. Even at 700 million Class C notes issued with a very low risk and low coupon
- 6%. In order for the holder of the notes while the P suffered any losses
requires that 30% of Remortgage were in default portfolio, which is veryunlikely.
Of course, this is highly simplified version perepakovki - actually
increasingly difficult - for example, eventually perepakovyvayutsya not mortgages
themselves, and they secured bonds, but I did not want to obscure the substance
of the details yet. Regarding perepakovki will separate post - when we write,
ladies link.
Similar structures described above are called CDO - collateralized debt obligations,
and the note of class A, B and C - tranches. So, Bear Stearns funds, roughly speaking, invested in the Class C notes and Credit notes, receiving the highest ratings - AA andAAA (because of the likelihood that the number of defaults will be sufficient
holder of the notes to those classes lost part of their capital is very low).
2) If you have invested in low-risk instruments, from where the problem? The
problems that they have done so with a relatively high leverage. One decreased funds for every dollar held its own
funds with $ 5, another - 10. This creates difficulty: let's say you took 90
dollars, added 10 and bought their money to these Loans with a nominal value of$ 100. Already in the fall in the price of the notes for 5 percent of the
lender will require you to report a few bucks own money to guarantee the safety
of its loans, and if regret it, remove your investment (note to sell in the
market) will take away their money, and you return what was left. At the same
time it notes that the fall in price can be caused by a temporary panic or some
technical reasons totally irrelevant.
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