Financial Institutions Left in Folly

The US subprime mortgage crisis looms large. Is it merely a problem of non-performing mortgage loans? We never imagined it would drag down the Japanese economy so severely.

This is because mortgage-backed securities, created using opaque, sophisticated financial techniques, were sold off to financial institutions worldwide.
Japanese banks, credit unions, and securities firms were also lured by the immediate returns. The losses are said to exceed 600 billion yen. Significant losses have been incurred. In essence, our deposits (funds) have suffered immense damage. This is not someone else's problem.

The Price of Believing Home Prices Would Rise Indefinitely

On this occasion, we must take the opportunity to re-learn about subprime loans. First, let's understand the term itself. 'Sub' is like in 'sub-manager' or 'sub-captain,' meaning subordinate or secondary. 'Prime' means 'best' or 'excellent,' referring to prime customers. In short, it refers to prime customers.

Therefore, subprime mortgages are loans extended to individuals who do not have ordinary or average incomes, meaning low-income earners who would not normally qualify for loans, or those with low social creditworthiness who have had past defaults or problems. Banks would start with low interest rates for the first two to three years, then increase them to a harsh 10-15% after five or ten years. Low-income individuals, buoyed by the housing boom, eagerly took these loans.

Lenders and Borrowers Both Riddled with Misconceptions

What cannot be overlooked here is that both the lending financial institutions and the low-income borrowers operated under the shared assumption that 'housing prices would continue to rise indefinitely.' Without much thought, it's clear that housing prices cannot possibly continue to rise forever. Japan's housing bubble serves as a close example.

In reality, while the business of lending and borrowing was meant to be a complete transaction between banks and low-income individuals, financial institutions bundled these problematic loans for a vast number of low-income borrowers, combined them with other dubious financial products, securitized them, and sold them off to banks in Europe and America, as well as Japanese financial institutions.
The purchasing European, American, and Japanese financial institutions also assumed that since housing prices would continue to rise, even if low-income borrowers defaulted on their loans, they could repossess the homes and sell them at a higher price, thus incurring no loss. They sold these securities globally based on this assumption. However, the US housing market took a drastic turn, prices began to fall rapidly, and the situation remains dire.

Don't Trust Specialized Knowledge

The assumption of endless price increases existed for both lenders and borrowers. Even so-called financial experts are only now realizing their folly. Japanese banks and securities firms, eager for the lucrative deals from America, competed to purchase these securitized loan assets. The repercussions are now a heavy burden. In effect, the specialized knowledge of banks and securities firms that ventured into new financial products proved useless, and they have suffered massive losses.

Especially in Japan, a policy of near-zero interest rates has persisted. With few profitable financial products domestically, institutions have been seeking high-yield financial products abroad, particularly from the United States.

This is a troubling situation. So, what should we trust? Individuals (consumers) are always the ones who bear the brunt of the damage. It can be stated with certainty that there is no alternative but to strive to make sound judgments for ourselves.