GLOBAL SUB-PRIME CRISIS

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BFCSA
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BFCSA investigates fraud involving lenders, spruikers and financial planners worldwide.  Full Doc, Low Doc, No Doc loans, Lines of Credit and Buffer loans appear to be normal profit making financial products, however, these loans are set to implode within seven years.  For the past two decades, Ms Brailey, President of BFCSA (Inc), has been a tireless campaigner, championing the cause of older and low income people around the Globe who have fallen victim to banking and finance scams.  She has found that people of all ages are being targeted by Bankers offering faulty lending products. BFCSA warn that anyone who has signed up for one of these financial products, is in grave danger of losing their home.

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BFCSA: Hedge Funds need Regulating and Enforcement of Law against Banks is critically important

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Hedge funds need regulating like banks to avoid financial instability, argues Penny Neal....Penny Neal is a Lecturer in macroeconomics, banking, and financial markets at the Flinders Business School, Adelaide.

 Causes

The immediate causes of the subprime mortgage crisis were the extremely low interest rates available from 2001 through 2004 and the poor quality of the loans that flowed from those rates. The US Federal Reserve reduced interest rates in response to the ‘tech wreck’ of 2001, which followed the dotcom boom of the late 1990s, and again reduced interest rates to steady market jitters following the September 11 terrorist attacks. The European Central Bank also reduced interest rates around this time, to deal with a slowdown in Europe. In 2003–04, the Fed was concerned about the threat of deflation and so further reduced rates in the US.   Lower interest rates meant there was a lot more money sloshing around in the economy looking for investment opportunities, and subprime mortgages appeared to be just the thing..............

What happened to all that money?   Subprime mortgages..........US subprime mortgages are similar to ‘low doc’ and ‘no doc’ loans in Australia..............

 How did the banks reduce the risks they had taken onto their balance sheets?  Securitisation.............

 In February 2006 the warning signs were in place":  there was going to be a big increase in defaults.............., the Australian Financial Review reported that bond insurers provided guarantees for $127 billion of CDOs linked to subprime mortgages.3   It also reported that banks around the world have written down billions of dollars given their exposure to bond insurers. Merrill Lynch wrote down $US3.1 billion, Citigroup wrote down almost $US1 billion, and ANZ wrote down $US200 million, mostly because of exposure to ACA Capital Holdings, a US monoline insurer.................

 Lessons

There are lessons to be learned from the recent crisis. First, the role of credit ratings agencies needs to be reassessed. Second, and most importantly, hedge funds and other institutions that borrow short and lend long should be brought under the purview of banking regulators.............A further reason for regulation is to ensure market integrity which in financial markets principally means that no single participant should be able to move market prices. However, short selling has recently become an issue because it appears that hedge funds have had the power to reduce share prices by borrowing shares, selling them (thus increasing the supply), buying them back at lower prices, returning the shares, and profiting from the difference between the sale price and the lower repurchase price. Sometimes, this has been done in conjunction with negative rumours being perpetuated in the market about the firm whose shares are being sold.   Recent examples include HBOS Bank in England, and ABC Learning Centres and Allco Finance in Australia................

 

 

Conclusion: Applying the ‘duck test’11
There are several commonalities between the subprime mortgage crisis and the previous crisis that threatened systemic instability on a global scale in 1998. Hedge funds and derivatives have been at the centre of the 1998 LTCM crisis and the 2007 subprime mortgage crisis............

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Guest Tuesday, 10 December 2019