Mortgage
Systemic risk
Stock exchange returns
Trusted, high quality and rock solid
When the interest rate began to rise in the spring and the first homeowners
started getting into trouble, a domino effect ensued. The market saw a couple
of rotten apples and concluded that the whole bushel had to be bad. Weak
repayment capacity on the subprimes was a systemic risk, which could not be
isolated and exerted its mischievous effects on the whole market. The effect
was furthermore accelerated by the rating agencies (like Moody's and S&P),
who started to downgrade securities by the block which caused even more of
a stir in the market.
"At the moment the credibility of investment vehicles was in doubt, no inves-
tors were willing to buy. But the products still had to be paid for and fïnanced.
The banks that had issued them more or less had to do that themselves. Prefer-
ably with borrowed money, and if not possible, then from their own reserves.
Other banks saw this coming and asked themselves whether they could
handle it. For reasons of safety they either put up their interest rates or simply
refused to lend the money. In the meantime, the insecurity had begun to affect
other investment products, even though they were only indirectly linked to
investments in the subprime mortgage market. So the systemic risk grew and
grew, mostly becauseofthe lack of trust between banks.
To bring back some semblance of normality to the loan and financial markets,
the central banks started to inject capital in August. Banks that saw little chance
of obtaining the money they needed to finance their investment vehicles
could borrow it from the Fed. "In itself, such a support measure is a fine instru
ment", says Rosenberg "but it confirms in the eyes of many that there is some-
thing wrong. Then you get such things as Northern Rock (UK Mortgage bank),
where savers panicked and queued up to withdraw their savings".
To counter that effect, the central banks had another idea up their sleeves. By
reducing the interest rate, they made it cheaper for banks to borrow money
on the market. 'This works very well with investors", says Rosenberg, "the lower
the interest rate on savings, the higher the motivation to invest on the stock
exchange. If enough people do this, the market recovers on its own".
As a consequence of the support measures, the end of the summer saw a
short recovery. By this time, most banks and investors had concluded that
they would have to write off a part of their losses. This can be seen in the third
quarter results. Rosenberg nonetheless warns that the market is certainly not
yet fully healthy. "In terms of the quality of the investment vehicles, we have
recorded progress, but in and around the American subprime world the pain
still lurks".
Bear Stearns, Citigroup, Bank of America, Chase, HSBC, IKB, LBBW, Mitsubishi
URFJ, Morgan Stanley - not the smallest banks - are taking a knock from the
credit crisis. That begs the question as to how well Rabobank did in compari-
son. Rosenberg answers confidently: "Rabobank is the most creditworthy of
the lot. Privately owned, a co-operative structure, a solid balance sheet position
and a not-easily-obtained triple A rating. Our name in the market is one that is
trusted, high quality and rock solid. At the very moment that a liquidity crisis
emerges, and that trust between banks themselves is damaged, then a bank
suchasoursfloatstothetop".
issue 15 THE WORD 25
