Subprime: It’s Still Really Bad

Countrywide shares gained

more than 32% today: that must mean the market thinks the subprime crisis

is over, right? Not at all. For one thing, today’s close of $17.30 a share puts

the company’s share price at pretty much exactly where it was all the way back

on the 17th of October, just over a week ago. The six-month

chart still looks really, really ugly.

And while there was lots of attention on Countrywide’s stock price, blogger

Calculated Risk was still paying attention to the subprime loan market –

you remember subprime loans, they’re what triggered this whole mess to begin

with. And it turns out that those notorious ABX subprime indices have

never looked worse, with AAA-rated paper being particularly hard-hit.

Both Countrywide’s stock and the price of credit protection on AAA-rated mortgage-backed

securities are forward-looking securities, of course. But the stock market is

naturally a far more volatile place, where intraday movements often don’t mean

very much. The bond and CDS markets, by contrast, are generally much less volatile

– indeed, that’s the reason why so many investors felt so comfortable

playing in those markets with a lot of leverage. So large moves on the fixed-income

side of things are likely to be more meaningful than a one-day jump from a very

low level in just one stock.

Or, to put it another way, we might have passed the "chaos" part

of the credit crisis, when no one had a clue what was going on and very short-term

interest rates, especially, started behaving crazily. But some very big bond-market

losses might yet still await us – and those, as we’ve seen, can have nasty

systemic implications.

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