I still cant get over how more difficulty in getting loans would have such an enormous, and continuous negative overall impact on the markets. I realize the home and lending segments make up a good chunk of the market, but how negative news in that sector can cause such broad, continous selloffs in a market that is this strong confuses me.
It isn’t just getting loans.
The debt market has a hierarchy. You, the consumer, are at the bottom of the heap.
When you take out debt (eg, a mortgage or car loan), the company that loaned you the money wraps your loan up into a package with dozens to hundreds of loans just like yours, and sells the whole conglomeration into the debt market.
That conglomeration of debt is what no one on Wall St. wants to buy any more. If your lender can’t sell a package of debt into the primary lending market, they in turn have no money to lend you.
Then there are loans made between banks/brokers. One example is “margin debt,” loans made to allow a trader to buy/short larger positions than they could if they traded only the money they have. Hedge funds, for example, are “levered up” to their necks — they might have $1B from investors, but by getting a margin line of debt of say, $10B, they can be leveraged 10:1.
Trouble is, when things go against the fund, the lender gets nervous and they either want the hedge fund to sell off their losing positions, or pay back the margin loan. This is where Wall St. is quickly becoming vapor-locked: they’re selling pell-mell, because the margin lenders are demanding more money to cover the margin calls on positions that are going negative.
My feelings exactly, the spread out of subprime and general tightening in ALL credit markets is having a domino effect that who knows where it will stop. I guess super easy credit sucked in way more people and corporations than anyone expected...
Mike
Its not just mortgages though. The whole corporate financing pool is drying up as well. So there goes the buyouts by private equity, which has been pushing the market up for quite a while now. Also limits companies growth when they can’t borrow for acquisitions or expansion. Or the cost of financing increases and all those projects cost more.