Finance Weblog: Subprime markets keeps hitting the front page

More and more sub prime news are coming into the spotlight. What supposed to be limited to a few states in the US has spread worldwide suggesting a small credit crunch.
Loses in hedge fund investment are not confined to the Bear & Stearns funds, last week an Australian hedge fund announced huge losses sub prime related.

Last Friday S&P, in its more proactive recent policy reduced the rating in 14 European CDOs tranches. The sudden consequence was a flight to quality as some feared that European financial institutions might be affected by this re-rating. This demand for long term European debt has the 10 year bund delivering roughly the same return as the short term Euribor. Last month fears of higher inflation expectations have been buried.

Earlier in the week, Bernanke assessed the damage of the sub prime rout. He estimated losses would be above 100 billion dollars. These are just money losses. Personal losses in terms of home ownership losses. Bernanke suggests new regulation will be put forward immediately to avoid reckless lending at the origin of this crisis. However nor this new regulation will avoid the meltdown nor it covers the whole universe of wrongdoing in this crisis.

Even Fannie Mae and Freddie Mac are loaded with sub prime loans, as recently reported. This comes out as an odd paradox that Government Sponsored Enterprises (GSE) are fully immersed in the housing slump. But part of the new strategy by these agencies have been induced by the government’s affordable housing mandate. This mandate intended to encourage home ownership for low income families or families living in distressed neighbourhoods.

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