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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Knighty Tin who wrote (85806)	11/22/2000 10:24:48 PM
From: BSGrinder	Read Replies (1) \| Respond to of 132070

Michael, What do you think of the validity of this sentiment, by Edmund McCarthy, a financial risk management advisor: "More fascinating is the absolute reversing of the principles in the relatively new asset backed marked. In this arena, parlous credits are packaged, enhanced, shrouded with derivatives, rated Prime and then sold to the money market funds. This is where we think the buck will be broken. By the time this dance has been completed, the holders in due course; i.e. the lenders, have no idea who the borrower is much less what the character of the borrower might be. The borrowers capacity to repay is also unknown but suspect given all the enhancements required. Capital is limited to the enhancements and they are computer generated. Essentially the lender is lending on a rating. In the last few months the writer has asked numerous holders of "money market" accounts if they have any idea of what proportion of their funds are backed by this paper. I have yet to meet one who had the first clue and the usual reply was that the writer had a screw loose to worry about it. Greenspan won’t let them take a loss! This area is also the one I would posit as having the greatest divergence from the fundamental principles of credit. The underlying borrowers represent a mongrel mix of subprime cards, autos and home equity, a variety of leasing deals of dubious capital and capacity and also missing as are the aforementioned consumer items of any question of character. Some stuff that otherwise might be syndicated is also to be found. It seems as if this is the new device or vehicle for credit, which is difficult to otherwise find a home. Here in money market land, virtually anything can be financially engineered into a rated piece of paper. THE INESCAPABLE CONCLUSION TO ALL OF THE ABOVE IS THAT CREDIT IS DIFFERENT THIS TIME. THERE ARE LITERALLY TRILLIONS IN CREDIT WHICH HAVE BEEN ORIGINATED AND SOLD ON PARAMETERS DERIVED FROM COMPUTER DRIVEN FORMULAS TO END LENDERS UNABLE TO UNDERSTAND, ANALYZE AND TRACK WHAT THEY HAVE BOUGHT. NO REGULATORY ENTITY CAN AGGREGATE AND EXAMINE THE SITUATION, MUCH LESS THE PUBLIC. There is tremendous incentive for all players to keep the game going. One of the other PRINCIPLES we were taught was that if credit grew fast enough; the delinquencies would not catch up. BUT THERE IS ALWAYS A LIMIT. Are we at or near it? Impossible to predict." Thanks, /Kit