18 September 2007
MORE FIGURES
NEEDED TO DETERMINE EFFECTS OF THE SUB-PRIME CRISIS
Alliance Trust, which has just
published an analysis of the chain of events that triggered the current credit
crunch, says that until more figures are revealed by the institutions holding
related debt or securities it will be impossible to determine exactly how harsh
the effects will be on the economy.
Shona Dobbie, Head of Alliance
Trust Research Centre, said, “There has
been a role reversal between the world’s financial markets and the economy.
Before this summer’s credit crisis, it seemed to be the economy that was
driving markets forward, and now it is the markets, and how well they can weather
this crisis, that appear to hold the key to the future direction of the
economy. We have uncovered a lot of astonishing facts and figures in our
research into the causes of the credit crisis, but what is most surprising is
how little we can unravel about where these enormous liabilities have ended up.
It is now up to institutions to untangle this web because trust among them can
only be rebuilt when we get more clarity.”
Alliance Trust’s research into
the sub-prime issue highlights some surprising figures:
- While lending to ‘sub-prime’
borrowers with patchy credit histories has traditionally accounted for
less than a tenth of the
- Sub-prime mortgages have a total
value of around $600bn, a tiny proportion of the more than $13trn US
economy
- Mortgage backed securities (MBSs),
products based on the expected income stream from mortgages, soon represented
25% of the total asset backed securities market, surpassing the market
share of securities backed by credit cards, cars and student loans.
- A complicated chain of structured
finance allowed the expected income from the original ‘sub-prime’ mortgages
to be packaged up, pooled, sliced and diced, mixed with other assets and
resold to other institutions. The high level of leverage involved along
this chain means that their impact on financial markets was magnified by
up to 100 times the value of the original loans.
-
ends -
Notes to editors
- Alliance Trust is an international
investment and financial services group. It is headed by Alliance Trust
PLC, the largest generalist investment trust company listed on the London
Stock Exchange. Through its subsidiaries, Alliance Trust offers investment
dealing, self-invested personal pensions and a choice of investment
wrappers.
- The Research Centre is part of
Alliance Trust and was formed to carry out economic
and social analysis to deepen our understanding of economies, markets and
socio-economic issues.
- Photographs of Shona Dobbie are
available.