At some point in the current cycle, such was the demand for high-yielding bonds and paper from investors that the hunt was on to find high-yielding assets to provide the cashflow. Subprime lenders suddenly found they could pass on whatever they could generate and, with that incentive, set about loosening terms. At some point, the edifice was bound to come crashing down, and so it has in spectacular fashion, with reverberations in a now globalised market in Germany, the UK and beyond.
The truly rationale players in all this were the subprime borrowers. They had no money to begin with and knew that they could walk away from these debts and declare bankruptcy.
There was the chance they would make money if the property market continued up but their losses on the downside were limited. Investors, on the other hand, are relearning once again that markets can go down as well as up, and banks are discovering that off-balance sheet is only off when there are no problems. Reputational risk seems to be bringing assets back on with increasing predictability.
