Archivo de febrero/2008

Una de las consecuencias del descenso generalizado en los mercados de capitales durante los

The effect of the housing market correction in the US has been felt worldwide through the sub prime crisis. Analysts had watched carefully other markets to follow. Whereas Ireland and Spain are two that has been considered to be over inflated, analysts are also watching the UK market. There are many reasons to worry in the UK. First, the UK has been the first market where a mortgage based bank has gone bankrupt and nationalized. The model business followed by Northern Rock might still be present somewhere else in the UK. Second there are many fraud elements in the UK market similar to events surrounding the US sub prime crash. The Financial Services Authority (FSA) has recently banned two mortgage brokers for handling false applications to lenders. Income and credit conditions are have been altered in an attempt to keep the ball rolling. Third, UK house prices have increased more than in US whether this is measured either in absolute values or in relative values, that is, relative to income (see picture below taken from a Merrill Lynch report). Fourth, interest rates are al high levels in the UK and any reductions in interest rates are currently difficult given inflationary pressures. The mortgage bill is likely to remain high for those holding mortgages. Fifth, household debt/income ratios are hitting record levels.

There might be many other arguments not mentioned above that justifies a correction. But I believe these are enough. We have learnt that mortgage crisis can easily have economic effects beyond national borders. This is why the UK housing is an additional worry in our current gloomy horizon.

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Last weeks were relatively quite in terms of economic news. Some good news from the retail sales front more a less worldwide (UK and the US specially), lower unemployment claims in the UK and few minor things. However markets still were relatively nervous. Monoline insurers had an important role in this nervous state. Monoline insurers were anew word for many, a hidden economic agent that hardly appeared in the news. But it is playing quite a big role in the last weeks. Are they going to be downgraded by rating agencies? Are regulators promoting changing legislation so they can operate within new market conditions? Is Warren Buffet going to rescue some of them?

Before all these questions are answered we have to ask ourselves why they matter so much. What is the economic effect of these downgrades? Briefly put, there are a few reasons why they are important economic agents whose downgrade can induce a chain reaction that affect the balance sheet of many companies. These are some consequences of the downgrade just to name a few:

a) If a monoline gets downgraded, bonds they have enhanced are downgraded as well.
If an investor has a mandate to hold investment grade assets, they have
30 – 45 days to sell the assets that have been downgraded.

b) CDO tranches kept by banks in their balance sheets are top quality that do not count
against their capital. Any downgrade of the CDO enhancer leads to a revision of the capital needs by these banks.

The monoline insurer

En unas semanas espero que se publique un nuevo libro sobre Inversiones Alternativas, del que soy coautor. El libro tendr

En el