Subprime & Asian Banks: How Not To Make Friends

I believe that forced liquidation of many portfolios in Asia will create further losses, but American borrowers will emerge in essence unscathed from all this. Holders of mortgage securities do not have any claim on the underlying assets, only on the intermediate companies, which will of course declare bankruptcy, thus leaving empty shells for lenders to pursue. Unlike in previous crises such as that involving the telecom sector in 2002, most of the losses will be absorbed by central banks around the world rather than North American or European commercial and investment banks...This is one of the greatest robberies of our time, and it will go unreported in essence. Hard-working Asian savers will see their central banks post billions of dollars in losses on the US mortgage crisis in the next few years, but nothing can be done about it given the general lack of accountability across Asia.... The Robbery of the Century, Chan Akya, Asia Times, 7/13/2007

The smart bank officers who invented the subprime mortgage market in the US, now falling apart at the seams, with $12 billion more downgraded on Wednesday, apparently never thought about the impact this would have on our ostensible allies in the East. In the Asian crash a few years back, the Chinese made a lot of noise (and a lot of Asians listened) about how this was a result of economic warfare by the West. It was hardly that, but the 3-card monte variety of finance that led to that Asian crash was invented on Wall Street. This time, the money put at risk is on behalf of American homeowners through real estate bond funds, emphasis on American.

This story is a paradigm of the underlying credit crisis in the American, and hence, the world economy. Desperate to push the consumer and housing markets, lending institutions across the world, but especially in the United States, have literally been standing on their heads to get money out the door. But, as the wise old investor, usually ignored in a boom, will tell you: if you ignore the fundamentals you'll lose your shirt (or your mortgage, or your mortgage-based fund). Bad debtors do not make for good returns.

Luther