Subprime Mortgages - How Bad?

Here's an interesting link I picked up today:

"The entire market in subprime debt is just 1.4% of the size of global equity markets. Or, to put it another way, a 1.4% downward fluctuation in stocks erases the same amount of value as if all subprime-backed bonds were collectively marked to $0."

Now, if all the subprime bonds were marked to $0, this would cause a lot of disruption, because the people who owned them usually borrowed the money used to purchase them. So who loses the money? Probably a lot of banks who made loans to hedge funds and other banks to buy these subprime mortgages. But regardless of who gets the shaft here, it's only 1.4% of global equity markets.

For comparison, the S&P 500 dropped over 1.75% yesterday, and this did not cause anyone to panic or assume the financial world was coming to an end. The difference is that stocks are probably less leveraged than subprime bonds (that is, people used their own money to buy stocks), so the owners are the same as the losers.

If subprime mortgages are going to ruin financial markets, then this would have to be because the losers are the lenders, and this might mean they stop lending to everyone else, and this brings investment to a stop. But you'd only stop lending to everyone else if they were bad credit risks, and corporate profits are still quite high and there are still plenty of prime mortgagee's out there (remember, this is all a problem with subprime lending, or lending to people with lousy credit in the first place).

Recession? Maybe. Titanic financial collapse? No.