The Long Reach Of The Sub-Prime Crisis

I'm continually struck at just how far-reaching the effects of what, so far, seems to me to be a rather-modest shortfall amongst the sub-prime mortgages (with only 17%, or so, two months or more behind in payments). It just shows how tightly-wound the economy really is, and how we really are all interdependent. What happens if we get a recession too?:

The Norwegian port town of Narvik is 200 miles inside the Arctic Circle, but that's not far enough north to escape the long arm of Citigroup. One of four Norwegian towns that invested millions of dollars in complex "structured finance" products cooked up by Citigroup, Narvik is now facing huge losses after the investments went sour, presumably because of their exposure to subprime credit woes.

From the Aftenposten:

So acute is the funding squeeze that some towns, like Narvik, couldn't meet payroll for December. Cuts in everything from education to child care programs to elder care and holiday Christmas parties loom.

Terra Securities, the investment banking arm of a coalition of Norwegian banks, marketed the Citigroup products to the towns, and representatives of the broker are making predictable comments about how investment success is never guaranteed. Buyer beware! But there's a catch. According to Norwegian press reports, Terra Securities provided translations of the prospectus in both English and Norwegian. But the part of the prospectus warning of the risk that one might lose one's shirt (and one's Christmas parties) was somehow omitted from the Norwegian materials.

Funny, that. A skeptic might wonder whether a full translation would really have made any difference even if the risks had been spelled out and written across the sky in giant pulsating neon letters. Certainly, the Norwegian municipal politicians who made the decision to go for the big returns weren't anticipating one of the worst credit crunches to hit global financial markets in decades. How could their child care program funding possibly be connected to whether or not a homeowner in Granada Hills, Calif., made sensible decisions on whether to refinance her mortgage?
Citigroup is also denying any responsibility for the bad Narvikian investment decisions.

But Citigroup has bigger problems. On Monday, it was vigorously denying a CNBC report claiming the bank would be forced to lay off of as many as 45,000 employees. (Thanks to Calculated Risk for the tip.) Meanwhile, a front-page article in the Wall Street Journal reported in great detail on problems Citigroup is facing working out loan modifications for homeowners facing foreclosure, especially for those whose mortgages are part of a $45 billion portfolio of subprime mortgages handled by AMC Mortgage Services, which Citigroup bought in September.