Monday, October 13, 2008

Being Securitized to the Hilt

Banks that have dealt primarily or largely with paper and not products are collapsing all around us. The biggest problem with the housing crisis, affecting markets worldwide, is that there are so many tranches (pools of debt differentiated by the maturity of the rate of return) that have no distinguishable value. If there is no known value, and in many cases the mortgage holder is not known because they have been securitized again and again, how can maturity be established?

Securitize these mortgages millions of times with no receivables, drying up liquidity, and it explains to a large degree where we are now. The homeowners are not without guilt too. Bankers banked on homeowners going along with the plan. Looks like the likes of Richard Fuld of Lehman Brothers did well in such banking. They banked on the American dream of home ownership and the theory of keeping up with the Joneses and did well to the tune of nearly 500 MILLION DOLLARS. I am so grossed out by Fuld! (I listened to the Washington hearings.) Are we sure he shouldn't be in jail and his hundreds of millions returned to stockholders who invested life savings with a purportedly sound bell weather financial institution founded in 1850?

With these tranches value is not known, yet we have a presidential candidate whose inconsistent ideas include a plan that buys up this debt nationwide at current value which essentially rewards the institutions which got us into this mess. But can Senator McCain and advisers answer the multiple billion dollar question of value? We could be buying paper that has essentially no value. With this plan, the taxpayers will ultimately be the loser.

(Post mostly taken from a comment written at under the post, Musings. Click the title above for a great Tom Peters' post.)

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