Why have sub-prime mortgages had such an impact on investments around the world when they are such a small part of the total mortgage market? Clearly there is more to this story than home loans. (And less to the people arguing that subprimes are too small to worry about.)
Going with the theme that things are all connected (by money), comes this article on "conduits". "Off-balance sheet affiliates"? That sounds a lot like Enron to me... Borrowing money to purchase investments that are now worthless? That sounds a lot like the 1920's stock market to me...
Debt Puts German Banks in a Bind
Financial Rescue Given State-Owned Sachsen LB Reflects Conduit Problem
Wall Street Journal
August 20, 2007
Investors around the world are snubbing many types of short-term debt as credit worries spread. That is posing particular problems for German banks, which issue a lot of such debt, known as commercial paper.
Many used the borrowed money to buy securities, some of which were backed by U.S. mortgages to people with weak credit, a market that is crumbling. Adding to investor concern is a lack of transparency. Many banks hold their loans in off-balance-sheet affiliates called "conduits" in industry parlance.
Mainly because of conduits, issuance of asset-backed commercial paper has exploded. As of March 31, there was $983 billion in such paper outstanding globally, up about fivefold from a decade earlier, according to Standard & Poor's Corp. Conduits issue commercial paper, borrowing money for terms of less than a year, and use that cash to buy longer-term bonds paying higher interest rates. The bank behind the conduit typically collects asset-management fees and investment profits.
The conduit business model breaks down if investors get nervous about the value of the securities the conduit has bought and stop lending the conduit money. In recent weeks, conduits have struggled to find buyers for their paper, and, when they have sold it, buyers have wanted sharply higher interest rates.
