Thursday, August 16, 2007

Don’t impede the greedy bastards

Clever headlines aside - US paper trail rams rate rise home – the whole sub-prime debacle is becoming tedious. Well it would be if it wasn’t so bloody alarming.

Australia’s biggest non-bank lender, RAMS, is the latest victim of the global liquidity contagion, unveiling a profit and dividend warning yesterday less than three weeks after an $885 million stock exchange listing.

RAMS founder John Kinghorn said "life was cool" until last Thursday, when the contagion spread rapidly from the US sub-prime market to "all bank and sub-prime borrowers".

Correct me if I am wrong, but we have been watching the home market meltdown for many months now, so one would think industry heavies might have had a little forewarning.

RAMS has a $14 billion loan book. All of its loans are 100 per cent mortgage insured. So any defaults from borrowers would be covered by the insurance company. Of that $14 billion, only $4 billion is funded by residential mortgage-backed securities. That's mortgages that are packaged up and sold to investors.

Around $4 billion is funded by what RAMS calls 'warehouse transactions' - broadly, like an overdraft with a financial institution; until the mortgages can be packaged and sold to investors. The final and biggest - and troublesome - bit is $6 billion in US commercial paper. That ties RAMS directly into the US domestic ripples.

RAMS's $6 billion in US borrowings is just a tiny part of Australian business's - actually, mostly banks and other financial institutions - total $700 billion-plus gross non-government, non-linked foreign debt.

Which raise some other domestic issues, particularly lack of government regulation over the commercial sector; but a readiness to bail them out of their messes. On the other hand the Howard Government has choked infrastructure development borrowing by state governments.

It seems government borrowing reduces the ability for commercial interests to raise funds. Ironically industry suffers because of lack of development, but they can wall in the debt swill bucket to their hearts content.


Kathy said...

This situation is bloody alarming, and from what I've read, the experts are blaming it on the Feds reluctance to cut interest rates. In the meantime, those of us close to retirement might have to work a little longer to make up for the losses.

reality-based educator said...

Helicopter Ben signaled he's ready to ride to the rescue today when he lowered the rate at the discount window. A benchmark rate cut is right around the corner...which means the dollar falls even more and the asset bubble that is the stock market will continue to inflate and the asset bubble that is the housing market will reinflate.

Cartledge said...

Australia's central bank Governor Glenn Stevens said he was at a point where he was certainly more worried about inflation being too high rather than economic growth being too low. He is also leaving our dollar to fend for itself for now.

reality-based educator said...

Didn't the Australian central bank just raise the rate last month?

Cartledge said...

Yes RBE and has signaled led a September rise as well. There are some interesting dynamics in play.