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.