Now we know how the real estate market has become a bubble and the demand side of the equation. In this episode, we will look into the supply side: the lending financial institutions. Traditionally, the subprime lending is the practice of extending credit to borrowers with high credit risk — e.g. a FICO score of less than 620, unable to access prime rate loans (hence the term “subprime”). Subprime lending became popular in the US in the mid-1990s, with outstanding debt increasing from $33 billion in 1993 to an estimated $1,300 billion in 2007. This substantial increase is mainly attributable to lending institutions which quickly realized that they could make huge profits from origination fees and from selling the asset-based securities (ABS) to investors. Continue reading ‘Home $weet Home (III)’
Monthly Archive for November, 2009
Having covered all details with regard to the main types of trading activities and the way a trading floor operates, let us move into the typical career path of a trader. One thing should be settled from the get-go: the hiring process for traders is extremely competitive. Depending on type of the trading branch and/or product the trader is hired for, the investment banks put more or less emphasis on the academic credentials. One can notice that more and more MBAs and PhDs are filling the trading positions. The main reason is the high degree of sophistication required by the continuously evolving products on the capital markets. Continue reading ‘Becoming A Trader (II)’
Many of my readers have become very interested in discovering the secrets around the trading world. To understand what a trader does, let us understand first how an investment bank trading floor operates. On one side, investment banks built-up expertise serving institutional clients to their own benefit via the flow trading activity. On the other side, the very same banks use their human capital to speculate market opportunities via the proprietary trading activity. The latter activity generates gains or losses from the volatility of financial assets, simply referred to as risk. Continue reading ‘Becoming A Trader (I)’
With a better understanding of the main causes behind the residential real estate bubble, we can move ahead and investigate the intrinsic mechanics of the mortgage business model. As described previously, the underlying distinction between different types of mortgages is: fixed rate and variable rate, also known as adjustable-rate mortgage (ARM). From a market perspective, there are two types of risks associated with the mortgage products: interest rate (IR) risk and currency (FX) risk. If you hold a foreign-denominated currency variable rate loan, you are exposed to both risks. Every time the borrower holds any of the aforementioned risks, the bank benefits unfairly by avoiding the hedging cost associated with mitigating that given market risk. Continue reading ‘Home $weet Home (II)’
This year, the conventional wisdom within the financial community is that the booming Chinese economy is going to pull the global economy out of recession. While the world is fighting The Great Recession, this unparallel economic system – a weird mix of communism and capitalism, records an annual GDP growth of 8.9 percent in the third quarter. During a trip to Beijing, Treasury Secretary Tim Geithner said that “China will need a very substantial shift from external to domestic demand, from an investment and export-intensive growth to growth led by consumption”. Allow me to show some skepticism when dealing with the Chinese economic miracle. Continue reading ‘China – A Financial Time Bomb?’
It is very hard to pick a ground-zero for the housing bubble that pushed the whole world into The Great Recession. Allow me to begin our trip in late 1989 in Japan. The stock market – symbolized by Nikkei 225 index, peaked at approximately 39,000, while the real estate market climbed the summit at approximately $1 million per square meter. This March, Nikkei traded as low as 7,200 while the property tags lost on average 90% of their peak values. We should notice that Japan experienced a dual-bubble shock and that has been underemphasized by many economists. Continue reading ‘Home $weet Home (I)’
Many of us are wondering how is US able to borrow trillions and trillions of dollars. Who is willing to lend them money, especially under current circumstances? The total US national debt is approaching $11.2 trillion. That is 11,200,000,000,000 US dollars. The Congressional Budget Office recently released a report in which they claimed that the total debt could reach $17.2 trillion dollars by 2019. What is mind-boggling is the amount of money that the US government pays every year to service this debt. For instance, the interest payments on the debt cost $452 billion last year, the largest federal spending category after Medicare-Medicaid, Social Security, and national defense. Continue reading ‘It Is Good To Be King’
Recent Comments