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Capital Markets

Australia: Sub-prime woes hit home down under

The sub-prime contagion has now reached as far from the USA, geographically, as it possibly can: Australia. In July Basis Capital, arguably the best-known home-grown hedge fund manager in the southern hemisphere, ran into serious trouble after defaulting on margin calls to several of its creditors. At the time of writing its survival was in the balance.

Sub-prime problems were never supposed to spread this far south. Australia has a sub-prime market – locally it’s called non-conforming housing loans – but it is tiny compared with the US industry. The Reserve Bank of Australia, the country’s central bank, spelled this out in the most recent edition of its twice-yearly Financial Stability Review, in March. Non-conforming housing loans, it said, "account for an estimated 1% of all outstanding mortgages, well below the 15% sub-prime share in the United States". The 90-day arrears rate on securitized non-conforming loans has increased over the years, to 5.25%, but that’s barely problematic.

Australia has been hit not because of its domestic real estate market but through the handful of domestic fund managers that venture into the US market. Of these, Basis has long been something of a poster child.

Formed in 1999 by Steve Howell and Stuart Fowler, Basis was built to undertake both fund management and securitization.

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