Tuesday, December 17, 2019

The credit crunch, sub-prime, and opportunity

First published September 2008

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We know that sound business principles should have told certain institutions not to go out on a limb and borrow to support lending that might turn bad if the economy suffered a downturn.

We know that government did not impose regulations on lenders to rein in on extending credit to people who could only continue to meet their payments so long as the economy did not suffer a downturn, or the interest on the interest on their debt started to become unmanageable.

But all the same, why some few months ago, did the lenders who lend to the mortgage lenders, stop lending to them?

I understand that the mortgage lenders lend on long term loans, and in the absence of a default, they cannot ask for their money back early. And I understand that the lenders who lend to the lenders, lend on short term loans, of six months or so.

And I understand that the lenders who lend (or did lend) to the mortgage lenders might have looked with concern at the rising number of defaulting mortgagors. For it would make them realize their borrowers' assets were overvalued for the reason that the inevitable consequence of defaults would be to drive the prices of houses down.

And I understand that the lenders who lend (or did lend) might have looked at the rising jobless total, which would signal that there were likely to be more defaulters.

But I can't help thinking that some of the bigger fish saw all this coming and saw an opportunity to make a killing.

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