Thursday, November 15, 2007

Are banks hiding more bad news?

In past blogs (Securitisation and its hidden costs, Can functionally organized banks "see" risk?), we have talked about the organizational problems of banks and mortgage brokers that exacerbated the subprime crisis. Now we find out that similar organizational problems may prolong it. Maverecon (via identifies the bigger problem behind the problem:
the sub-prime crisis is but the tip of the credit risk mis-pricing iceberg. Unsecured consumer loans and car loans, and the large stock of ABS backed by credit card receivables, are waiting to join the credit risk-repricing party.

The single best thing that could happen would be for the true magnitude of the losses suffered by banks and other exposed parties to be revealed and put in the P&L. Until what happens, fear of getting stuck with the hot potato makes banks unnaturally unwilling to extend credit against the kind of collateral that they would not have thought about twice accepting at the beginning of the year.

In other words, banks continue to make bad loans in order to hide the bad loans they have already made.

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