End Result of this debacle...US financial industry loses face?

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Submitted by GoUSC on August 15, 2007 - 10:22pm

As the Asian markets have an absolute disasterous day (Korea down over 7%!) it has me wondering what the long term impacts will be. The world has relied on Wall Street as the defacto finacial capital of the world. They rely on our markets, our financial firms, traders, brokers, analysts etc. With the word coming out that a good percentage of the CDO's having been sold to the rest of the world (Asia & Europe) is the end result here a US financial system with a lot of egg on its face? How much trust can the world have in our rating agencies that CLEARLY blew it. Or the financiers that wrapped up all this crap and sold it off? Are we going to see the rise of the foreign markets to better compete with our markets?

Submitted by bsrsharma on August 15, 2007 - 10:50pm.

Some more quotes:
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“Investors are now starting to question economic projections, stock market projections and public officials,” said Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research. “They are questioning American consumers’ continuing ability to spend beyond their means.”

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As they have been for much of the last four weeks, stocks were driven by grim news from the credit markets.
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KKR Financial said it lost $40 million on the sale of $5.1 billion in mortgage securities and had another $5.8 billion in bonds to try to sell, which could result in the loss of another $250 million. Shares in KKR Financial, which went public in June 2005, fell 31 percent, to $10.52; the stock is down more than 60 percent for the year.

The company restructured from a real estate investment trust to a limited liability company in May. It finances most of those securities through asset-backed commercial paper vehicles that were downgraded last night by the rating agency Fitch from its highest level to junk grade because of the decline in value of the underlying assets.

The company said it would no longer invest in residential real estate and must decide what to do with the remaining portfolio of mortgage-backed securities.
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He said he had been through numerous financial crises “and this is the most disturbing liquidity crisis, with real impact throughout the economy if it does not rectify.”

One analyst suggested that the market would not recover until more funds and banks detailed their exposures to mortgage securities and other debt acquired during the recent credit boom.

“The more funds that come to confession the better it is,” said Douglas M. Peta, chief market strategist at J. W. Seligman & Company. “Once all this stuff is out, all the analysts and the people with the sharp pencils can figure out how bad it is and they can put prices to it.”
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Investors are saying, “I want only the highest credit quality, where the principal is guaranteed by the Treasury,” said Brian J. Carlin, head of fixed-income trading at JPMorgan Private Bank.
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Submitted by HereWeGo on August 15, 2007 - 11:16pm.

That's a very good point, radelow, one I have considered for some time. I've thought more from the perspective of the American mortgager's credit, but your focus on the "financials" is probably a better one.

Let's be honest: savers around the world were fleeced by these organizations. That's going to take a long while to overcome.

Submitted by PerryChase on August 16, 2007 - 9:12am.

It's been happening slowly and this will accelerate the decoupling.

America is the world best customer and financier. However, as foreigners lose their money in America, they are bound to look for new places to invest their money. What would you do?

Our failure in Iraq also add to the loss of American prestige and influence.

The world has factories. All we have left is services. If foreigners lose confidence in America, we won't have much of a competitive advantage.

Submitted by bsrsharma on August 16, 2007 - 9:30am.

PerryChase,

I would be equally concerned about the flip side too!

Read:

However, as Americans lose their money in America, they are bound to look for new places to invest their money.

If Americans lose confidence in America, we won't have much of a competitive advantage.

This is the classic Capital flight scenario that blights weak nations. I am not sure we have a built in immunity to this ill.

Submitted by sdnativeson on August 16, 2007 - 10:03am.

Nothing new under the sun... people always come back for more.

"The meltdown in financial markets may seem scary or mysterious, but it’s part of a time-honored story. In Chapter One, a new financial instrument makes capital available to a new class of borrower, and the result is profits for the innovator along with gains for consumers. In Chapter Two, a group of not-so-smart investors misunderstands the novel instrument and bids its price up too enthusiastically; when the inevitable bust follows, the innovation is denounced as inherently dangerous. Then, in Chapter Three, the complaints blow over. The not-so-smart investors learn their lesson and the new instrument stabilizes. Financial innovation turns out to be beneficial without being scary, but by that time another newfangled instrument has emerged to frighten people, and finance is hauled before the court of public opinion — again.

This is likely to be the story with the current subprime mortgage meltdown, just as it was with subprime’s close cousin, the junk bond.

Junk bonds, you will recall, are a way of getting loans to companies that stand a big chance of defaulting, much as subprime mortgages enable people with questionable credit to buy homes. During the 1980s, the value of junk bonds in circulation went from nothing to around $200 billion, enabling dozens of fringe companies to innovate and experiment. Then, in the early 1990s about one in 10 junk borrowers lived up to their names and defaulted, and junk bonds were widely denounced. But the fuss was over quickly. By 2000, the value of the junk bond market had soared to $600 billion. Nobody doubted that fringe companies should have access to finance, provided that they compensated investors for the risk that they might fail"

Submitted by lendingbubbleco... on August 16, 2007 - 9:37am.

End Result of this debacle...I buy my next house;)

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