Subprime Mortgage Crisis Drying Up Liquidity of Debt Market

May 25 (LPAC)--The "warehousing" of debt packages by a number of banks in the US sub-prime mortgage market recently was triggered by the investors' demand for higher premium on both sides of the Atlantic. This is posing a crisis to the loan markets, says analyst Paul Davies writing in the Financial Times of May 25.

Davies says the crisis illustrates just how quickly a market for selling loans can shut down. Furthermore, that close inter-relations between different securitized debt markets means that the sub-prime mortgage market has had an impact on the funding for leveraged loans and other kinds of debt.

The FT analysis stems from a recent report by the chief strategist for Merrill Lynch of New York who wondered whether liquidity was actually starting to ebb. The report had pointed out that the reason such a conclusion could be reached is because the cost of leveraged buy outs could be on the rise and secondly, that equity investors were demanding higher premiums to pass companies into private hands.