rams a test for sub prime, page-11

word, tis good to have some cogent posts on here, however I feel I should correct a number of quite serious errors.

Firstly the comment about central bankers as incompetent civil servants - this is a little harsh! Certainly there will be many junior and some middle ranking ppl who are not sufficiently across the issues/are fools (just as in many big companies, sadly) but Glenn Stevens and Ben Bernanke are no mugs. Similarly the 2nd tier of RBA executives are also acutely aware of relevance ABCM - talking to john broadbent last week only underscored to me just how thoroughly aware the RBA is of its influence on ESA holders, both bank and non bank.

Your second point regarding the housing bubble in the US and the massive increase in leverage is sensible. However the fallout from this will effect those who hold the debt and homeowners, not the issuers; and provided issuers can transparently show that they hold AAA rated debt they won't have problems borrowing again, nor shoulder any loses, once the credit crunch abates. Certainly you can successfully argue that US lenders are not going to write so many large loans going forward and less ppl will be wanting to buy property, but the severe US housing slump does not apply in oz and Rams loan book growth going forward is unlikely to be effected. Indeed no bank/non bank lenders I am aware of have reported seasonally adjusted loan book contraction as of the end of august.


Some other mistakes:
1. You talk of lax RBA lending standards allowing banks to 'lend more than usual'. Actually basel II will allow banks to REDUCE their capital requirements and thus lend far MORE than they can currently with the same capital. It is APRA who implement this but from jan 08 the big four and mac bank (for instance) will need to hold far less capital to maintain their loanbook.


2. You see ABCP and RMBS holders as new kids on the blocks who, having got burned via CLO defaults, will simply never lend paper again. Sorry but that is ridiculous - while they will steer clear of murky CLOs (or at least demand a proper risk premium over Prime 1 paper) they will return to prime 1 and AAA paper. This is already happening - the only paper being placed at present is AAA rated. In the short term they may insist on shorter maturities - focusing on 1 day or 3-4 days - but this will return to the favoured 30 and 90 days in time.

3. The real longterm change, once the crunch abates, will be the LEVEL OF DISCLOSURE paper writers will be required to give. This is already happening as banks seek to calm investor unease by disclosing an unusual level of information about their holdings, especially their exposure to subprime loan assets.


The way this plays out through the system as I see it is that this restarts the lending cycle. Initially only AAA backed mortgages from strong banks at 50 basis above LIBOR get away. Then competition from the discount rate (and repo extensions that the RBA have put into place) will push down the bp premium for these top lenders and increase volume. This in turn will create additional markets for lower ranked securities (AA- say) and for smaller or less well known writers. The commercial paper market will recover with a single change: a more thorough disclosure document perhaps with some extra red tape for writers.

Anyone who tells you otherwise word has a hidden agenda.