What is Subprime and How deep is the Cut ?
You switch onto CNBC TV18 or NTDV or any other similar sites, you most like will come across the term Subprime which the investment experts are regularly discussing about. I’ve discovered two articles which’ll give you an idea what Subprime and Subprime lending is.
Understand what is Subprime and Subprime lending is.
The article pasted below explains how deep the Subprime cut is and what it means to the Indian Market.
There are two theories in context that we have arrived at. Theory One says that subprime low size is at USD 1 trillion. These are the Bank of England estimates. 20% of all subprime is bad, which is valued at close to about USD 200 billion - that’s the estimate of Deutsche Bank. So from USD 2 billion, we bring in a credit multiplier; five times is a rough estimate that people have - if you reduce the credit multiplier to three, the extent of write down will be lower. If you increase it, then the extent of write down will be on the higher side.
To be conservative, considering a realistic estimate of about five times, the total write downs can be seen as close to about USD 1000 billion - that is equivalent to USD 1 trillion.
We have already seen a write down of close to about USD 100 billion already till date happening. So expected further write downs according to Theory One, is USD 900 billion.
Moving on to Theory Two, the US mortgage industry size is close to about USD 10-12 trillion - that is estimated as of 2007. This estimate is given by the US government website.
14% is the US mortgage industry, is subprime at USD 1.4 trillion, according to a Deutsche Bank estimate. 20% of subprime loans are delinquent/bad - that is close to about USD 280 billion. Again, if we introduce a credit multiplier effect of five times, we arrive at close to about USD 1400 billion and a write down seen till date is about USD 100 billion. So estimated further write downs are USD 1300 billion.
Thus, net-net, we are seeing a range of USD 900 billion to about USD 1300 billion further write down.
These are CNBC-TV18 estimates.
Let’s see what are other experts saying.
Stern Business School is expecting a write down of about USD 1000 billion, Bank of New York is seeing USD 800 billion further write downs, Merrill Lynch is seeing USD 600 billion, Ben Bernanke has upped his write down estimates from USD 150 billion in November to about USD 500 billion as of yesterday and Goldman Sachs values the subprime estimates of about USD 400 billion.
We saw subprime coming into effect - the first write down was seen in September ’07 and the first estimate came by December ’07. In December ’07, we saw subprime estimates of close to about USD 300-800 billion, which is now upped from USD 400 billion to USD 1000 billion.
To sum up everything - USD 1000 billion is a size of the Indian economy, and that is the extent of write downs that people are expecting.