How Bad Loans in US Can Have a Far Reach (1/2)

A listener in China named Turbo wonders why problems with subprime home loans in America can influence world markets.

Subprime mortgages are loans to people who may not have enough money to repay them. These and other risky housing loans are often grouped with other mortgages and sold as debt investments. Investors all over the world have bought bonds and other securities based on subprime mortgages as a way to earn higher returns.

Sometimes, the investors are banks that want to spread their risk by investing in several different countries. What happened in late July to a German bank, however, is an example of spreading risk with bad results.

IKB Deutsche Industriebank had put money into American debt securities, including some based on subprime loans. Some of those loans started to fail. The bank was in danger of not being able to pay its short-term debts. Other German banks, led by the government-owned KfW Group, agreed to provide almost 5 billion dollars to aid IKB.