The financial press is all worked up about the recent travails of two hedge funds involved in the world of structured mortgage finance.
The reader may wonder at this point why everyone is so upset over a couple of hedge funds — let alone why the typical San Diegan, uninvolved in the financial industry as he or she is likely to be, should care at all.
The answer is that the hedge funds blowups may illuminate similar vulnerabilities facing many financial institutions. Closer to home, they do a great job of illustrating just how it was that mortgage lending ever got so incredibly lax — and just why the easy lending we’ve all come to know and love may not be with us for too much longer.
Germany’s first chancellor Otto von Bismarck once remarked, "Laws are like sausages. It’s better not to see them being made." I believe Bismarck would have a similar feeling about mortgage-backed structured finance. I know I do. But for the sake of background, let’s go through the creation and funding of a typical batch of high-risk mortgages.
read more at voiceofsandiego.org
Excellent article, Rich. It
Excellent article, Rich. It provides a necessary introduction to the CDO sector’s impact on housing finance. I hope it doesn’t get lost in the flood of news this week.
Thanks Rich for a very
Thanks Rich for a very clear, well written
description of how these financial instruments work.
Since we are nearing the 4th of July I would like
to relate this story to illustrate a point:
In the early 1960’s I was over at a friends house
in North Long Beach for the 4th. His folks had
just purchased a “Uncle Sam Super Jumbo Family”
fireworks assortment.
Just as it got dark and we started to light off the
fireworks, someone decided to drop a hot sparkler
in the box.
Suddenly a firework in the box lit off. Then another.
Then another. The next few minutes of time are
forever welded in my memory.
Needless to say, the entire box was destroyed. (Along
with the family picnic table in the backyard).
My question is this: Does anyone fully understand
what’s inside the MBS/CDO fireworks assortment?
Do we even know the dimensions of the size of the box?
Is it even possible to begin to predict in which order
the finanical fireworks will light off?
My limited understanding of these markets indicates than
trillions of dollars are at risk. Is that possible?
Thanks for a great site!
Here is an article from MSN
Here is an article from MSN today that may answer some of your questions octal77, and is directly in line with what Rich says.
http://articles.moneycentral.msn.com/Investing/JubaksJournal/DeepeningDebtCrisisHitsCloseToHome.aspx