RAMS Home Loan Group Shares Fall 20% on Subprime Concerns


How is it that the behaviour of American consumers can affect interest rates in Australia? This morning, for example, we read that shares in RAMS Home Loans Group (ASX:RHG) fell by twenty percent yesterday. The non-bank lender said the subprime problem in the States may have a “material” impact on its profit.

As far as we can tell, RAMS doesn’t actually own any of the suspect subprime-backed debt that lurks on the balance sheets of pension funds, hedge funds, and banks. But RAMS does fund its mortgage operations partly by packaging up the loans it’s made and selling them as mortgage backed securities. With the market for those securities vanishing, the company loses a source for funding new mortgage lending. It doesn’t always take higher interest rates to slow activity. It just takes reduced appetite for riskier assets.

And another by-the-way, notice how casually the term “non-bank lender” is used these days. You know you live in a credit bubble when there are whole sectors of the economy that lend money outside the banking sector. When interest rates are low, there’s money in lending money. When they go up, or when the people you’ve lent to can’t pay you back, there’s not so much money it.

When will it be time to buy banks, brokerages, and financial stocks? The big investment banks on Wall Street are howling for the Fed to cut rates. Goldman Sachs (NYSE:GS) is down 27% from its US$233 trading high in June. Macqaurie Bank (ASX:MBL), by comparison, is down 28% from its high earlier this year at AU$98.64. Goldman lost another US$7 yesterday (4% if you’re scoring at home.) Another few days like that and we can only imagine what obscenities Hank Paulson might be screaming at Ben Bernanke.

How about this…it’s time to buy financial shares again when the words “subprime” and “private equity” have disappeared from the newspapers. When people are tired, sick and disgusted from reading about the whole industry…when it’s reviled, hated, and shunned in polite society…then it will be time to buy. We’re definitely not there yet.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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