Subprime Subpar
Friday, March 16, 2007
Ruth Simon, senior special writer for the Wall Street Journal, and Tony Crescenzi, chief bond market strategist at Miller Tabak & Co., an institutional trading firm, discuss how problems in the subprime mortgage industry caused the stock market to plummet this week--and may yet have further economic repercussions.
Comments [1]
The conundrum that Alan Greenspan mentioned in his February 2005 testimony to Congress was about the persistent low long maturity Treasury interest rates in the midst of the relatively high short term rates of 5.25%.
The housing bubble in 2005 enabled many more people to become potential buyers ￢ﾀﾓ bcause lender dropped standards.
Mortgages became securities.
In the 1980s, ￢ﾀﾜmortgage backed securities￢ﾀﾝ were composed of federally insured loans. In 2004 and 2005 we saw bonds backed by uninsured mortgages. But because investors were hungry for yield, they accepted very thin spreads over the federally insurance mortgages.
Private equity deals have stalled as either the investment banks which lent to the private equity firms cannot syndicate their loans or the private equity players have had to paid a higher rate on the loans or both. This was signal that lenders have finally recognized that there is always a risk that loans may default.
This dries up credit for people who buy stock.
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