Extent of losses caused by subprime crisis not known

SPEAKERS at a financial seminar in Dublin yesterday warned that the extent of the losses triggered by the subprime mortgage crisis, threatening to push the world into global recession, were still not fully known or understood.

Dr Patrick Dixon, author of several books on global business change, said the subprime crisis was “just one tiny fragment” of the lending crisis facing the banking sector.

It could be at least six months before the full extent of their exposure is ring-fenced and the losses are fully known. The bad debt crisis will be further affected by what “unfolds in the housing market in the United States over the next few months”, he said.

As this crisis evolves, he doubted that interest rate cuts would do much to boost consumer or investor confidence in the global economy.

Many loans are “long-term fixed” and the sensitivity of the consumer to short-term rate cuts would be minimal, he said.

“So you pull on the lever and you find there is only an elastic band at the other end. That’s the problem with the Bank of England which is contemplating interest rate cuts at the moment, and that applies elsewhere as well.”

Rate cuts may help but they will not ease the bad debt exposure facing the banks, he said.

Ned Cazalet, an independent insurance analyst, warned those attending the Friends First seminar that the uncertainty and market turbulence could drag some major banks down with it.

A key difficulty “is that we are dealing with an unknown unknown”.

The problem has been the securitisation of debt into complex investment packages, the contents of which were unknown even to the banks, he said.