Random financial notes

Prices of basic food ingredients are up more than 30% in the past twelve months:

Prices of all kinds of ingredients that are put into packaged food and drink products are rising rapidly, with many showing no signs of slowing down any time soon.

In the first half of the year, Lehman Brothers’ ingredients cost index – which covers cocoa, coffee, oats, tea, soyabeans and milk among other commodities and is based on spot rates – rose 14.9 per cent. This follows a 16.5 per cent increase in the second half of 2006.

The biggest increase has been in powdered milk prices, which have almost doubled compared with the same period a year ago. Barley prices have shot up by 53 per cent, while corn prices are up 68 per cent.

Ian Shackleton, Lehman’s food analyst, said European consumer companies appear to be facing the most sustained increases in ingredient costs in at least a decade. “We’ve been used to one or two years of ups and downs . . . but we seem to be having much more consistency of uplift [in prices].”

Meanwhile, the financial firm Bear Stearns finally informed its clients that its two hedge funds that invested in subprime (i.e. high-risk) mortgages are now worthless:

Bear Stearns told clients in its two battered hedge funds late yesterday that their investments, worth an estimated $1.5 billion at the end of 2006, are almost entirely gone. In phone calls to anxious investors, Bear Stearns brokers reported yesterday that May and June had been devastating months for the portfolios.

The more conservative fund, the High-Grade Structured Credit Strategies Fund, was down 91 percent by the end of June, investors were told. The High-Grade Structured Credit Strategies Enhanced Leverage Fund, which used extensive borrowings and assumed more risk, has no investor capital left, the firm said.

I’m especially surprised that this revelation hasn’t occasioned more comment. The easy mortgage credit of the past few years has been driven by investment firms like this one, and $1.5 billion is a small fraction of the total subprime mortgage credit that was issued. If the subprime mortgages that Bear Stearns was holding turned out to be totally worthless, how much value is likely to remain in the subprime mortgages held by others?

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2 thoughts on “Random financial notes

  1. What would be interesting would be to find out where (regions) those subprime properties were. For instance, could we detect trends such as all subprime mortgages in Michigan are defaulting? And if we knew this, what would we do about it?

    I was going through some documentation on my home loan the other day out of curiousity. I’ve built up equity in the home, paid my bills on time, and generally been a good borrower as far as this goes. However, my mortgage (as do most mortgages out there today) contains a clause that states the lender can demand the full amount at any time and for any reason. I checked, and by law ANY lender can do this.

    So if this lender were to invest heavily in subprime and get in over their head, but then need to suddenly raise capital real quick … folks like me are in trouble. Our normal mortgages can suddenly get called due and I’ve got to come up with 10 years worth of payments in a month or lose my home. It’s questionable whether the Veteran’s Administration would step in to save me or not. Surely our bankrupt government couldn’t afford to step in and save everyone … wouldn’t they become in effect the world’s largest landlord?

    I tell you … since discovering this little fact, I’m putting every spare cent towards that mortgage … hoping to squeak in under the wire and get it paid off before the whole dang banking system comes toppling down.

  2. Ernest,

    It’s not exactly what you wanted, but here you’ll find a couple of maps that show where foreclosures are happening.

    From what I’ve read, it doesn’t look like the shaky lending is restricted to hot real estate markets like California and Florida. Michigan is usually mentioned, Atlanta is apparently about to collapse, and I just read a post from a mortgage broker in Kansas City who told tales of shady lending that sounded about the same.

    I think it’s not even a urban/rural difference. A few years ago while living in fairly rural Bristol, Tennessee I remember a fellow enthusiastically telling me about a bank offering him a huge line of credit based on the equity in his home. I didn’t understand it at the time, but now I know that this was a HELOC, meaning Home Equity Line of Credit, which is the main device folks everywhere have been using to bolt an ATM to the side of their homes. So I expect that the rural crash may come more slowly and have less impact, since housing prices are much lower, but reckless use of credit is probably just as widespread as in urban areas.

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