Date: Fri Jun 20 2003 12:19
trotsky (cjk) ID#377387:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
Countrywide is at the heart of the mortgage bubble Ponzi scheme. as long as it can gow fresh credit faster than the rate of defaults on its existing loans, it can continue to issue glowing earnings reports. the trouble begins when credit growth , for whatever reason, begins to taper off. then much of the collateral backing its loans will mean-revert to its intrinsic value, and the rate of defaults may well at some stage surpass the growth rate of fresh credit. then it does an "Enron", i.e., goes from record profits to default in the space of one or two quarters. people in the industry don't take such warnings seriously. since they live INSIDE the bubble, they can't see that it is one. and they figure that if push should come to shove, they will be protected by the mountain of derivatives they have acquired to 'hedge' their exposure. however, once a market reaches 70% penetration, it is likely saturated - and every drop of fresh credit injected in addition to what is already a disturbingly large amount, perforce is issued to debtors that are simply not creditworthy, or in the case of many refis, LESS creditworthy than they were last time around. so the potential for a big financial accident inreases by the day. as for the 'hedges', when Russia collapsed in '98, many hedge funds that had hedged their Russian debt exposure inter alia with otc Rouble puts found that their counterparties simply wouldn't, or couldn't pay up. it's the type of insurance you're unlikely to be able to collect on when the time comes, simply because your counterparties go tits up before you get the chance to do so. |
