Hi Daniel,
Glad to hear from you. I have done my best to answer your questions below in the order received.
Quote:
|
From my understanding, it seems like not only we're banks involved in the securitisation part of this process (i.e. they structured the deals), but they were also the investors in the assets themselves….so not only did banks sell off these assets to other investors (like pension funds, insurers, etc.) they also kept some of the "assets." Is this a correct understanding?
|
Yes this is a correct understanding. Some of the investment banks would either quire these pools of mortgages as investors or keep some of the pools that they securitized as investors themselves which is why so many of them are having troubles now.
Quote:
|
how does this whole 'write down' business link-in with this? Are the insurers, pension funds writing down these assets as well? Or only the investment banks? And what does a write down actually mean?
|
Accounting rules require that investment assets be carried on the books of companies at market value. So if for instance one of these banks or another investor paid $100 Million for a pool of these mortgages, but because of everything that is happening they could only get $50 Million for that same pool now, then they are required to carry that asset on their books at a value of $50 Million going forward instead of $100 Million. This is true even though they are not selling the asset, and why it is called a writedown, because they are writing the value of the asset to down to market value even though they have not yet realized that loss. This is called Mark to Market Accounting and I have a video on the affect of this which you can find below:
Subprime Crisis Free Video Course: Is Mark to Market Accounting Making Things Worse?
Quote:
|
Also, at the first stage of this process, who did these investment banks "buy" these mortgages from? Was it like regional commercial banks?
|
Yes they bought them from banks and other institutions that were involved in the business of mortgage origination.
Quote:
|
Who were the lenders of this ST debt to these investors? Did this ST debt funding dry up as investors got anxious? And what is the link with this and credit spreads?
|
The lenders of the short term debt where other banks, and participants in the commercial paper market which is the market that companies with high credit ratings use to finance short term obligations. Yes, this funding did dry up as investors got anxious, which put the institutions who were using this debt to finance their investments in a precarious position, because they could no longer get the funding they need to do so. How investors getting anxious is represented in the debt markets, is by the interest rates that are being charged to borrowers going up. This is what the widening of credit spreads basically means, in other words the interest rate difference being charged on something like a treasury bill which is considered safe, and something like short term debt issued by one of these banks widens out with the interest rate on the government debt staying low and the interest rate on the short term company debt going significantly higher.
Hope that makes sense. If there are any other questions or comments on this one please feel free to post.
Best Regards,
Dave