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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum

GLD 380.06

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To: elmatador who wrote (15326)	3/14/2007 10:56:09 AM
From: TobagoJack	Read Replies (1) of 218012

got this in my e-mail ... it talks about the financial profit you alluded to earlier as being the backstop to chaos ... reconsider your position, and fast i would add that it seems that many mortgage loans that have not been classified either sub prime or Alt. A are very likely in fact of sub prime quality. this is a typical phenomenon when credit standards are as relaxed as they were in 2004-2006. the threshold for classifications of debt risk also begins to sink - since it all depends on the internal controls of lenders. there is a strong incentive to classify debt as safer than it really is, as this will enhance the spreads that can be earned post securitization. i haven't really followed the respective practices in MBS that closely, but i would be surprised if some of the tricks that are employed in corporate debt weren't employed in this market as well. for instance, you bundle e.g. a number of somewhat dubious loans, and then get either a large bank or one of the credit insurers to write a credit guarantee on it. presto, Moody's et al. (btw., look at that chart, MCO) will issue a rating that has little to do with the quality of the underlying debt, but instead is derived from the rating of the insuring entity. over time, an enormous time bomb develops. note that mortgage losses already in the pipeline are estimated to range from $210-$350 bn. (presumably the wide range comes about as the extent of delaying tactics as well as the amounts recoverable from collateral are not precisely known) - and this is only 2 months into the crisis period. it follows that the S&P index is now far more overvalued than previously thought, as about 1/4 to 1/3rd of its reported profits will disappear (financial sector earnings).

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