Clarity Builds on Subprime

The most important point that I would make with respect to the subprime dilemma is that investors everywhere are engaged in a discovery process, a process that is helping to restore calm to the financial markets.

When the subprime problems became front-page news, enormous uncertainties existed with respect to five key questions:

1. How big is the subprime market?

2. How much of the subprime market is at risk?

3. What amount of subprime loans are likely to default?

4. Who is left holding the bag -- which lenders will have to take writedowns?

5. Will the problems of the subprime spill over?

Answers to these questions are slowly being answered and a consensus is developing on most of them. Savvy investors are looking for the winners in the current dilemma.

Every major firm is trying to answer these questions for their clientele, and a wealth of information is pouring out and aiding the discovery process.

The consensus answres seem to be:

1. About 15% of the mortgage market, or about $1.5 trillion.

2. Several hundred billion dollars.

3. Between $50 billion and $100 billion.

4. Many names and they are nonbanks.

5. Still open for debate but not much yet.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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