Monday, November 5, 2007

Why the focus on Investment Banks?

There is an old expression, “As goes the banks, so goes Wall Street”, probably first uttered by an investment banker. However to some extent the phrase holds historically true. Spill-over from major issues impacting all investment banks eventually pervade all aspects of the economy. This is why there is such significant focus on the plight faced by these large firms recently. The broad structured finance market issues are likely to spill over into your personal finances. The issues from mortgage backed CDOs already have contaminated the consumer market; it is more difficult to get a mortgage and several “supposedly safe” money market funds have taken hits.

Even though the issues at big firms in New York seem remote from your corner of America, the impact will shortly be found steering down main street bringing after-shocks to your doorstep. Therefore it is important to pay attention and have an understanding of the situation, and its potential to impact your personal finances.

One good summary of potential upcoming CDO write-downs at some of the leading Wall Street firms was provided in the blog today. The dilemma is that the waters are still very murky in regards to whom is holding the bag, and just how large the bag is. More worrisome, the sacks holding credit card derivatives and commercial paper structured debt have not even been opened yet. Both are likely to hold a frightening Pandora’s box of further unwelcome revelations.

As clear as alphabet soup: banks’ CDO exposures

Another article from Forbes reveals that 12 to 15% of the CDO-related assets held by many of the investment banking firms are basically not priceable, and will probably have to be written further down in value.

“Goldman Sachs classified $72 billion of assets, 15.6% of its trading inventory, as "level 3" in the third quarter, which means it couldn't come up with any way to price them using market data. Morgan Stanley has 15% of its trading assets in the level 3 category, Bear Stearns 12.6% and Lehman 12.3%, according to research by Sanford Bernstein.”

Forbes: Credit Crunch – More to come


artifex said...

Hmm. There's been various commentary to the effect that prime, jumbo, mortgages, necessary to the Californian market, are much more expensive compared to non-jumbo mortgages than they used to be.

Sometime in the next few months I'd intend to refinance - any suggestions about a good strategy ? The mortgage is my only debt, and I've as good a credit record as possible.

Good to see you here - saw your posting on the Cisco alumni list and subscribed via RSS immediately.