Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Central Banks Buying Securitized Debt to Save Banks from Collapse

Interest-Rates / Credit Crisis 2008 Jun 20, 2008 - 01:35 PM GMT

By: Adrian_Ash

Interest-Rates

Best Financial Markets Analysis Article"...Ninety-five per cent of the credit created by UK banks in May went to buying back loans that they'd already sold to other investors..."

BANKS LOOK to lend money. Investors want to get rich. The Pope's been known to attend Mass.

Sounds simple, right? Once you've chosen your wool, just stick to your knitting.


Yet the first two groups – banks and investors – fought so hard to swap clothes in the 10 years to last summer, little wonder they've both now worn holes in their sweaters.

By the end of 2007, lending banks in the UK had converted and sold off some £246 billion ($480bn) of their loans as so-called "securitized" debt. And why not?

After all, a lender collects monthly payments from home-loan or credit card debtors. Bundle enough mortgages or credit-card loans together, and a pension fund manager can then take the role of lender instead. He'll receive those monthly repayments and book them as investment income.

Thus loans made to UK consumers and business – following the hugely successful US example – were parceled and sold onto eager investors wanting a piece of Britain 's own go-go economy. The bank or building society got an immediate return of the money it lent (plus a fee income, of course, split with the investment bankers who arranged the sale). The investor, meantime – whether a pension, insurance, hedge or overseas fund – got a fixed-income asset with a known maturity date, plus a little "payment default" risk to spice up their day.

This magic money-go-round enabled UK banks to make more loans to more people more often. Twenty-one per cent more debt, in fact, than the direct loans they themselves made and then kept on their books.

As for the lenders – now meaning foreign and UK investors – they got to turn a profit from buy-to-let, auto, small business and credit card loans made in Leeds , Lincoln and Lanarkshire. Okay, so they never met the borrowers. Nor did they get to study the borrower's pay slips or credit record. Nor did they see a surveyor's report of the real estate or fixed capital investments underpinning the whole deal.

But that was alright. Because the banks were still judging the risk as though they themselves would end up on the hook. Right?

Come the 2007 surge in sub-prime defaults in the United States , investors finally caught onto what securitization meant for the banks' risk assessment.

Just imagine! Families with low or no income cannot repay jumbo-sized loans! And if those triple-A rated borrowers hit trouble and walk away from their debts, who knows where the next blow-up might come...?

As the panic spread from (apparently) rock-solid US home loans, investors fled new deals in UK debt, too. More crucially still, many previously keen funds also wanted to quit their existing investments.

"Markets for many securities [are] currently closed," noted the Bank of England on 21st April. So "banks have on their balance sheets an 'overhang' of these assets."

The most troublesome assets were mortgages and credit-card debt, plus the "commercial paper" used to refinance securitized debts that the banks themselves held. But with no one to sell to – and no one willing to lend against these assets – "their financial position has been stretched by this overhang," the Bank of England went on, "so banks have been reluctant to make new loans, even to each other."

Hence the collapse in UK mortgage approvals to the very lowest on record, sparked by the number of mortgage products on offer collapsing from 10,000-plus to nearer 3,000 today.

Thus the collapse in UK house sales that's followed...and hence the collapse in UK house prices, along with the downturn in consumer confidence and spending it always brings.

Funnily enough, however, UK banks and building societies still managed to sell a record total of £16 billion-worth ($31bn) of these assets – "securitized loans" – in April. That month outstripped the first four months of 2007 combined!

Who in the hell bought this debt nine months after the securitization bubble went bang? Step forward the central banks, waving tax-funded loans at the banking sector.

"Since August," reports The Economist , "a large number of banks have designed asset-backed securities, backed mostly by mortgages, purely for European Central Bank consumption.

"Of €208 billion [$320bn] of eligible securities created, only about €5.8 billion have been placed with investors, according to calculations by J.P.Morgan. In one noteworthy deal in December, Rabobank, a Dutch institution, issued €30 billion of mortgage-backed securities, €27 billion of which were designed exclusively for refinancings with the ECB."

Word in the City says UK banks, via their continental subsidiaries, have also been dumping new securitized debt onto the ECB over in Frankfurt . The chart of ongoing securitizations above would suggest more than a little central-bank buying, as well.

But come April – at last! – the Bank of England opened its purse, widening the range of financial securities it accepts in return for lending to banks. They can now park "top rated" mortgage and other securitized debts with the Old Lady, reducing their "overhang" and moving ahead like nothing has changed.

Any coincidence that May then saw a record volume of debt shifted away from the banks?

Still playing tough, however, the Old Lady will only accept securitized debt that was already sat with the banks before the end of last year. And in the free market for securitized debt, the problem remains.

The Pope, we believe, is still a practicing Catholic. But selling new debt to non-bank investors looks all but impossible unless central banks – those "lenders of last resort" during a crisis – keep stepping up as "buyers of last resort" instead.

And with private-sector investors still trying to exit the assets they'd already bought, banks here in London (and no doubt on Wall Street) are having to do the strangest things.

Ninety-five per cent of the credit they created last month, for example, went to buying back loans that they'd already sold to other investors.

Only another £255 billion to go...a mere half-a-trillion dollars worth of bank risk trying to return to its source.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules