“There is a moment in every financial crisis” when the average person realises that “far-off shrieks from Wall Street could lead to pain closer to home”, says Dwight Cass on Breakingviews.
Enter the state of Florida’s Local Government Investment Pool, used by the state’s schools and municipalities for short-term investing and everyday expenditure.
Eager for extra yield, it scooped up debt issued by Structured Investment Vehicles (SIVs, banks’ off-balance sheet investment funds), which have subprime mortgage assets; in total the fund has around $2bn in SIV and subprime-related debt.
It emerged late last month that the Florida fund contained some supposedly high-grade mortgage-backed securities that had been downgraded by ratings agencies. Investors, panicked by the whiff of subprime exposure, rushed to withdraw funds – with $13bn, almost half the assets, taken out before the state froze withdrawals. This in turn left insufficient funds in the kitty for some schools and municipalities to pay their bills.
And Florida isn’t the only example of supposedly conservative local finance officials dabbling in exotic securities with public money, says The Economist. Nine other US states have direct investments in “shaky SIVs”, as do many county-level funds.
Municipalities in Norway and Australia have also been caught out by complex securities. “New bombs” continue to explode in “unlikely places”, as Lex says in the FT, showing that credit problems are still spreading. So much for containment.
Where else might problems crop up? Take a look at the car loan market, says Merrill Lynch’s David Rosenberg. At the end of September, about 4.5% of loans taken out last year by top-rated borrowers were at least 30 days delinquent, up from 2.9% the previous month – the sharpest increase in eight years. Car loans have also been “repackaged at record rates into asset-backed securities” – $89bn in 2006 alone.
About $100bn of credit-card debt has also been packaged up, according to Wirtschaftswoche. With consumers increasingly feeling the pinch, derivatives based on credit cards and car loans also look set to hit financial institutions’ balance sheets. Throw in the news that UBS has announced a fresh $10bn subprime-related write-down, which also points to more pain ahead for banks, and it’s clear that the crisis is far from over.