Date: October 14th, 2011
Cate: Finance, Risk & Stability, Systems

Big trouble is coming to a bank balance sheet near you

In 2007 the sub-prime meltdown was the leading indicator to many of 08’s troubles.  The problem is now winding its way through to prime mortgages.  This is very dangerous for bank balance sheets.  If a bank is leveraged 10:1 a 10% loss reflects a total loss of equity, bankruptcy.Khan academy Banking primer here.

The markit indeces shown below represent prime mortgage securities and thier current prices. Many people are now strategically defaulting or giving up their homes with negative equity.  This deleveraging process is now endemic in the US economy and may lead to further slowing down of throughput (GDP).  Please note these events are slow processes not headlines, they take years to work out.

John Steinbeck’s, The Grapes of Wrath is a purposely long read. The great depression wasn’t an event, it was a long and grinding process which likely changed 2 generations thought on debt and responsibility.

Below is an explanation of the PrimeX indices and their most recent prices.  These mortgages aren’t sub-prime liar loans, these are responsible people who are now in over thier heads due to un-employment and the de-leveraging or d-process in the economy. The mortgages below have high FICO scores, good LTVs etc. These are the “good mortgages” which are now melting down.

And so the long sad process continues…


Leave a Reply

You must be logged in to post a comment.