We have seen in the previous parts of this story how loans could self-feed. To this, you have to add that the main goods (i.e. real estate) bought with lent money strongly increased their value. Thus, they could back larger loans, and since as we have seen, lending money is profitable for the bank, there was some pressure on the owner to use this possibility and ask for other loans to finance various kind of consumptions.
It looks that this “surplus value” coming from the raise in house prices, was also used by the bank to built “mathematically risk-free” securities that mixed mortgage backed securities and commercial papers (a money-market security issued by large banks and corporations to get money in the short term), creating a potential “infection” between financial and industrial worlds. Moreover, these securities have been bought by low risk monetary funds, spreading “risk virus” in places where there wasn’t a preparation to managed it (since it was not supposed to be needed).
It’s worth noticing that Satyajit Das foresees an “epical bear market” since he calculates nearly a quarter of commercial paper cirtulating in US (550 billion on a total 2,200 billion) are indirectly backed by mortgages. As himself is one of major experts in credit and derivatives, himself a developer of “exotic” financial instruments, you’d expect he’d defend them, and his worried opinion makes you think. The most interesting element in his research is that he calculates that 1 “real” dollar backs something like 20-30 dollars in loans. In other words the financial world seems to be a “giant with feet of clay”: Das stresses that it’s in particular worrying that in last year derative market reached a volume of $485,000 billion (nearly 8 times US GDP). “Worrying” is not the volume itself, but the fact that is missing an interational coordination in regulation, quality and standards — meaning investors do not know what they are buying.
Original post (in italian): Crisi del credito: è appena l’inizio? (parte 3)
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