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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: orkrious who wrote (53464)	2/11/2006 5:17:31 PM
From: Ramsey Su	Read Replies (1) \| Respond to of 110194

I just finished reading that article earlier this afternoon and am glad that somebody posted it here. It is about as timely as they come even though we already discussed exactly same issues 3 months ago here. <gggggg> Message 21880859 What I like to add to Barrons' article is risk layering. I opine that we have no way of measuring that indicator right now. I suspect that while a subprime loan may present 1 or 2 layers of risk a yr or two ago, there may be 4 or 5 now. e.g. the original subprime loan may be just a low FICO loan, just 1 risk. Then it is low FICO plus high LTV, 2 risks. Then it is low FICO, high LTV, piggyback, 3 risks. Then it is low FICO, high LTV, piggyback and stated income, 4 risks and so on. As these layers of risks got piled on, it does not take a perfect storm to knock down the subprime bubble, just any one of many events. In fact, it may already be loaded to a point that price appreciation or that salary increase MUST happen to avoid financial disaster. Regarding the lower-ranking tranches of sub-prime mortgage-backed securities, bonds rated triple-B minus and below, I have this thought. Typically, these are very thin slices representing a very small part of the securities offered. However, these are the tranches that supposedly removed the risks for the higher ranking tranches, allowing them to be priced so ridiculously low in the last few years. If these BBB- tranches get wiped up with defaults, who will buy them in the future unless the price skyrockets? What would that do to the overall rates? Sure looks like GREBB day aftermath to me.