Over the coming weeks and months, it will be interesting (and critically important) to see if market confidence wanes regarding the mountains of credit derivatives and credit insurance. If and when sentiment turns, we would not want to be left holding asset-backed securities, asset-backed commercial paper, or any of the sophisticated “paper” created during this bubble. With the very poor initial quality of so much boom-time lending, and with the dramatic deterioration in the general credit environment, there are enormous quantities of securities in the marketplace backed by weak (and weakening) underlying loans/collateral. It may be triple-A, but “buyer beware.”
A few weeks ago I wrote a commentary (September 29, 2000-A Tale Of Two Bubbles) underscoring the extraordinary circumstance where the bursting of the technology bubble was occurring concomitant with a continued expansion of an historic real estate bubble. This unfortunate dynamic clearly continues. This week, Fannie Mae reported that it increased its mortgage portfolio by $12.6 billion during October, an annualized rate of almost 27%, and the largest growth since August of 1999 (which, by the way was a month where liquidity faltered within the credit market!). Interestingly, the average balance of “other investments” increased $4 billion to $59 billion. Average “other investment” balances have increased $9 billion (18%) in the last two months. Once again, it is the ironic and dangerous circumstance that heightened stress in the U.S. financial system leads only to greater excess from the mortgage finance superstructure. The real estate bubble grows by the month, greatly increasing the risk to the U.S. financial system and economy. |
