The world's financial markets are set to remain volatile for months to come - that is the verdict of a group of Bermuda's senior investment and economic experts.

The Investment Roundtable Discussion, which was hosted by LOM Asset Management's headquarters in Reid Street, heard about the the cause and effect of the current turmoil in the marketplace from Jon Heckscher, vice-president and general manager of LOM, LOM's senior portfolio manager, strategist and economist, Iraj Pouyandeh, and Attila Koperecz, hedge fund advisor and portfolio manager for Pangea Capital.

Among some of the topics up for debate were the reason behind the volatility and the subsequent chain reaction, the impact of the US subprime mortgage crisis on the worldwide markets, the role of central banks, the current market climate and the future of global markets.

Mr. Heckscher opened the meeting, explaining that it had been called in a bid to address concerns about the current state of the world markets.

He said: "A lot of what is happening in the markets right now is about uncertainty and we hear a number of different opinions on those issues, so there are no right or wrong answers."

He went on to outline what has happened to the market and what created the volatility, pointing out that the biggest factor was the US Federal Reserve making cutbacks on reserves from eight percent down to four percent in 2001. This allowed people easier access to capital and borrowing, which many saw as a golden opportunity to buy a new home, said Mr. Heckscher.

But as the market started to pick up again, he explained, the Fed raised interest rates and mortgage lenders had to come up with a new idea to keep the housing market going, so they decided to introduce Adjustable Rate Mortgages (ARMs), which lock borrowers in for two years and then the rate increases.

"Anyone was given this mortgage and anyone who had the choice to refinance did this," said Mr Heckscher.

"That credit now a household name, known as the subprime and people are starting to default or are later in their mortgage payments because they are unable to pay them."

He said mortgage lenders then came up with the idea of using CDOs (Collateralised Debt Obligations) to package that debt incurred together in a pool of assets, but suddenly all of these assets which were loaned out have been forced to reprice and the assets dried up. And in the last couple of weeks these companies have reigned in the amount of money they lend, causing the liquidity crunch, he added.

A number of banks in both the US and Europe have bought these subprime loans, often as CDOs, which are now worth a lot less than what they paid for them and are difficult to sell and, as a result, investors have turned to risk free securities (US Treasuries) instead and the liquidity market has dried up, according to Mr. Heckscher.

This had the knock-on effect of banks tightening their purse strings, causing borrowers to have limited access to new cash, which is detrimental to their future earning potential and therefore stocks were sold as the prospects for future economic growth became more uncertain. Meanwhile worried investors held onto high amounts of cash, forcing the Fed and the European Central Bank to make large sums of money available to commercial banks to try and alleviate these shortages.

Mr. Pouyandeh then gave an insight into what is going on with the other global markets at the moment.

"The housing markets usually take a long time to adjust to what is happening," he said.

"So I expect the housing market in the US to go on correcting for another nine months to a year.

"But there are more serious problems - while house prices are falling, there are problems for the consumer.

"The US consumer has been very resilient in the past - people say 'Here they go again - they are going to sink', but they have managed and they will continue to do so as long as the US labour market keeps up.

"There was a slowdown in consumer spending and since then the retail market has not been that good, so going into the second half of the year there is not much momentum in terms of spending."

But he said on the flipside overall global spending will help out the US economy.

"There is some optimism there," he admitted.

"The world economy is growing fast, especially Asia, and exports are good and that is a very good factor for the US.

"Asia's growth is very much premised on exports to the US and their finances are a lot better."

Mr. Heckscher said that, despite all the current doom and gloom, there is reason to be optimistic as some confidence has returned to the market, pointing to the Fed acting earlier this month by cutting its less-followed interest discount rate half a percentage point to 5.75 percent to ease short-term financing of businesses, with banks such as the Bank of America, Citigroup, JP Morgan and Wachovia all taking advantage of this opportunity to allow their clients to access new capital.

Mr. Koperecz said the credit crunch was down to people having to increase their leverage on their borrowing in order to get a better return and he reckons the market will face further volatility for the next few months.

He said: "Where I think we will be in the next year is still experiencing continued volatility.

"We were in the first leg of rest of the 2005/06 subprime market with these ARMs', which were the basic tasters."

Mr. Heckscher wrapped up the meeting by saying there could be some benefit to be gained from the whole crisis.

"It is going to open up some opportunities I think," he said.

"Big companies that are leveraging mortgages are all of a sudden going to be great takeover targets as their asset values are going to to be so low."