19 August 2008 - Allan Kleidon

"The U.S. subprime crisis reflects fundamental changes in the way mortgages are funded and structured. Instead of a local bank primarily lending the savings that individuals have deposited at that bank, the development of securitized funding means that an investor in, say, Brisbane or Sydney can fund a mortgage in, say, Cleveland Ohio. We will examine the structure of the U.S. subprime mortgage market, including the role of securitization, and what led to the subprime and related credit crises. The U.S. and Australian subprime/non-conforming mortgage markets are then compared.

"While differences between the mortgage markets mean that Australian banking institutions are unlikely to face the direct problems seen in the U.S., the linkages among world financial markets imply indirect consequences for Australia. These include losses to Australian investors in overseas sectors hit by the subprime crisis – and given the nature of securitized loans, more losses will come – but also more widespread fallout via interest rates and credit restrictions. Litigation has followed, and more is likely." Allan W Kleidon.