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Sub - prime story... after the break

It’s a relief of sorts that markets finally realized the sub-prime crisis is not over. The fact is the dirt accumulated over the years is not going to be washed away as soon as newspapers forget them. Out of headlines does not mean problem-solved. Sub-prime remains the biggest of all the financial risk possibilities, more than inflation, because nobody knows which bank is next on the line and if the financial system will be able to digest these near-bankruptcies scares quite well.

The last estimates from Bloomberg quotes about $391billion write downs due to sub-prime. This is certainly not the end. It was speculated at WEF, Davos that total amount of $1trillion may need to be written off from the banking system books. That’s still $609billion away. So, how and when is this $609billion going to be written off? My guess, in a much orchestrated fashion with Fed helping out the bankers clean up their closet with tax-payers money. Fed does not have a choice. Tax-payer, as always is between devil and the deep sea, and does not have a choice.




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It is expected that these entire set of loans would written down in next three quarters. That is a huge sum to be written off by these banks. Hence, Fed had to pitch in with the extended help. Bill Gross of Pimco estimates about $600b loans come to maturity this financial year and unless banks take some sensible action (like deferring rate triggers and avoiding foreclosures) the economy will have to live through a real scare.

Fed's move though a placebo, did well in waking up the markets to the fact the picture could get a lot uglier only that this time Fed and others will have sensibility to manage this and will not be blown into a crisis proportions.

So, what does that mean for investors in short term?

  1. Yes, Banking stocks are at delicious levels but remember the side-effects of sub-prime before you take the plunge.
  2. Market may have forgotten its worst nightmares only that it may recur. The themes may recur especially during the result season
  3. Is everything lost? Certainly not. There is life out there in different sectors. Hoping and praying the wizards of street screw up on rehabilitation.
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