For all the fear and loathing there was yesterday in the wake of the announcement by newly-listed mortgage group, Rams, that its earnings would be materially impacted by the subprime mess in the US, its been obvious for quite a while that there was an impact here.
But all those who said the subprime mortgage crisis would not spread to Australia from the US, they were right. We have a small subprime sector, only a tiny proportion of borrowers compared to the huge, seething mass in the US.
The impact is on borrowers: companies like Rams that use or invest in US markets.
What all the "experts" forgot is the way financial markets have become global these days, with the internet, rapid communications, laptops and blackberry's in every room and not much sense among a bunch of people in the US who should have known better.
And that impacts on sentiment and confidence.
The knock-on effect on interest rates, on share prices and on confidence from the gathering crisis in the US and in Europe spreads quickly, andarrived here yesterday with a slump in bank share prices because of a warning from the newly listed independent mortgage group, Rams Home Loans Group.
At the same time the Australian dollar was knocked lower as the so-called yen carry trade was unwound and Japanese and other investors quit high-yielding stocks and retreated.
The dollar peaked at 85.05 USc on Monday in the wake of the Reserve Bank's hardline on interest rates and inflation, but yesterday afternoon it had fallen well under 84 USc (under 83.50 UScin New York) and was exploring ways to go lower.
Of course, the impact of the subprime mess has already been seen here: the increased volatility in share prices is one example, the plunge in the prices of investment banks like Macquarie and Babcock and Brown, and of course the problems that have hit hedge funds, Basis Capital, Absolute Return and Macquarie Fortress.
Rough estimates of the losses so far in these funds are around $1 billion. Several smaller players, including clients at ANZ Private Bank, have lost money.
But the impact yesterday was twofold. First a front page story in The Australian quoting Bluestone, thelow doc/no doc mortgage group, warning that the impact was already being felt on its business, with higher interest rate spreads, and therefore higher interest payments.
Bluestone warned that this would also be felt by other lenders, including mainstream banks.
But what surprised was the statement from Rams before trading opened on the ASX at 10 am, with its warning of a 'material' impact on its finances from the widening ripples from the subprime implosion.
Rams shares collapsed, plunging 54c to $1.21, or down more than 30%, with more than 16 million shares traded in the morning. They rebounded in the afternoon to end at $1.41, down 19% on the day, and down 43% since listing.
Rams had just listed on July 27 at $2.50 a share through a listing that saw the shares placed with professional fund managers. Around $695 million was raised. UBS handled the issue. The Commonwealth Bank's funds management arm has just over 5%, Perpetual did have a similar holding, but shown its stake under 5%.
The founder of Rams, Sydney businessman, John Kinghorn, received hundreds of millions of dollars in the sale, but has kept a stake of just over 20%.
The CBA fell $1.62 at one stage, but closed at $54 for a loss of 60c on the day. Westpac ended at $25.85, off 29c but it was down 54c at its low for the day.
The ANZ ended 39c down at $28.70, but was off 49 at its low, the NAB closed at $39, down 23c but it was off 85c at one stage. And St George fell 53c to $33.88, but fell 41.23 at its low point for the day.
Macquarie Bank shares slipped 94c to $70.61 at midday but finished down $1.32 with a further fall in the afternoon to close at $70.23. It fell to a low of $69.89. Babcock and Brown was down 50c and the shares of Bendigo Bank, Adelaide Bank and Bank of Queensland also fell.
In fact, Bendigo Bank, which is merging with Adelaide Bank, ended only 5c lower on the day, the best performer by far but reflecting its different business model.
Rams said it was too early to tell what that impact would be and that it was monitoring the situation.
"Given the current level of volatility in the global debt markets, the directors believe that it is premature to determine with certainty the extent of the likely negative financial impact on RAMs for FY2008," it said
"However, if current market conditions continue it is likely to be material."
"The directors will continue to monitor the impact of credit market volatility on RAMS' funding programs and will continue to keep the market informed," it added.
Rams said it has three main sources of funding for its mortgage business – wholesale transactions with financiers, residential mortgage-backed securities (RMBS) in the Australian, European and US debt markets and extendible commercial paper deals.
It said that at last Friday, August 10, its loan book was $14.16 billion, with $3.92 billion funded by warehouse transactions, $4.07 billion in RMBS and $6.17 billion is US commercial paper.
"RAMS settlement volumes continue to be strong and in line with prospectus forecasts," it said.
"RAMS confirms it has no sub-prime lending exposure and all of its loans are 100 per cent mortgage insured."
It noted that the extendible US commercial paper market had been experiencing "unprecedented disruptions" in recent weeks.
"Despite these difficult conditions, RAMS has continued to successfully place its short term extendible commercial paper, albeit at spreads that are materially higher than forecast," it said.
"RAMS continues to evaluate its options for existing and future funding arrangements.
