- Subprime is about 13% of the $10 trillion total mortgage market, or about $1.3 trillion.
- Currently about 17% of subprime loans are delinquent. For our purposes here, however, let's assume that 50% of subprime loans ultimately default.
- That would put the total defaults at $650 billion.
- But remember these loans are backed by homes, so let's assume that when the homes are ultimately sold, the debt holders will receive 50 cents on the dollar, or $325 billion.
- My study of the situation indicates that the banks and investment banks sold about 50% of the loans to insurance companies, retirement plans, hedge funds, private equity groups, etc., and kept the rest. That would put the amount in banks and investment banks at near $163 billion.
- Next, assumed that approximately 70% of the loans stayed in the US and 30% went abroad. That would give us a final exposure to the US banking system of near $115 billion.
Thursday, November 15, 2007
I have been trying to get my mind around the subprime problems for months. I keep asking myself the same questions everyone is asking: how can it be so bad and so widespread, who's next, and who or what am I missing? Over this past weekend, I decided to take a 30,000 foot look at the situation to see if I could make more sense of the crisis from that perspective than I had been able to wading around in the fast flowing currents of the news of the day. It occurred to me that the macro approach would at least offer a way of putting the subprime crisis into perspective, relative to the US economy. I quickly found that there is as much bad data on the subject as there is good. In truth, no one knows what the ultimate outcome will be; however, I found a way of thinking about the issue that made sense to me, and I have seen others coming to conclusions that are similar to mine.