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3 Rocking the subprime
house of cards By Julian Delasantellis
Some stories, such as corpse custody
battles between sleazy lawyers and semi-literate
Texas trailer trash et al, the US news media
handle really well. On others, such as goings-on
in the world's financial markets, they don't have
a clue.
Thus the media saw the big February
27 decline in the Chinese stock market followed
by a big decline in the US and in other world
financial markets that same day, and decided
that being coincident equaling being causative was
a concept that the US
public could get its mind around pretty easily.
Suddenly it's all China's fault.
Mind you,
the US media know they will always do well by
blaming foreigners, especially non-Western
foreigners, for problems of essentially domestic
origin; had he not died in 1991, you would have
half-expected to see Khigh Alx Dheigh, the actor
who played the nefarious Chinese communist
operative Wo Fat in the 1970s US television crime
drama Hawaii Five-O, displaying his
trademark evil smirk while taking credit for the
whole thing on Fox News.
People who make
their living trying to ride and tame the living
creatures that are traded in financial markets
approach the issue of causation, of "why"
something happens in the markets, with no small
measure of trepidation. Sometimes determining
cause is easy; if you see that a pharmaceutical
firm's stock is down sharply, and then you see a
report that the company's new chemotherapy drug
kills more than it cures, well, in that case,
putting one and one together is fairly reasonable.
In other cases, and especially regarding the
market as a whole rather than just an individual
stock, "why" can be a fairly tricky question to
answer. As then-US Federal Reserve chairman Alan
Greenspan said in congressional testimony
regarding the panic selling of the 1987 US
stock-market crash, "Why were stocks going down?
Because people were selling. Why were people
selling? Because stocks were going down."
For those who make their living in
markets, the logic is impeccable.
This
time, was it China? For one to believe that it was
would require that Chinese stock prices and
values, and by extension the Chinese stock market
in general, were so large and important as to
occupy an absolutely central position in the world
economy. The Shanghai Stock Exchange, China's
equity-trading benchmark, is divided into two
sections. The A-shares, which took the big hit on
February 27, consist of 825 listed share
companies. Foreigners are mostly forbidden to hold
or trade A-shares, which certainly makes it a bit
harder to swallow the idea of a worldwide equity
meltdown spreading out of the A-share market
resultant from foreign investors selling equities
on a global scale to cover their Chinese losses.
The part of the market open to foreigners, the
B-shares, is much smaller, comprising about 55
listed companies.
So a
9% one-day decline in a
market that had doubled in the past year, taking prices
back to where they were less than two months
ago - a market that is in essence closed to
foreign participation -caused a global stock
market rout that, in the United States at least,
wiped out US$630 billion of stock equity value
just in one day?
Possible? Sure,
anything's possible. But it's damned unlikely.
A 9% loss is bad, but you could always
make it up. Markets do recover from losses. What's
a lot worse is a 100% loss on your investments.
Total wipeout - you don't recover from that. A lot
of investors who thought they were making canny
and sharp investments over the past few years are
now facing this prospect, and the possibility of a
cascading stream of successive defaults and
bankruptcies is hanging over the financial markets
like a specter.
In the US, it's called
"subprime lending".
In olden
times, young bankers had drilled into them the adage that "if
the bank lends a man $1,000, the bank owns him; if
the bank lends a man $1 million, the
man owns the bank". Large loans have, by the
possibility of loan default implicit in all
private lending, the potential of bankrupting the bank
and then starting a chain reaction of defaults
among other banks. So bankers were taught the importance
of careful, cautious, prudent lending.
Prudent lending. For modern bankers, that
might ring a bell, something they read in a dusty
old tome they once glanced at in the
business-school library.
Back in the days
of It's a Wonderful Life, the mortgages
that George Bailey wrote from the Bailey Building
and Loan originated in Bedford Falls, and they
stayed in Bedford Falls. George Bailey could say
what no modern mortgage banker could: "Your
money's in Joe's house right next to yours. And in
the Kennedy house, and
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