modom (palindrome guy) > wrote:

>The trouble is that the crummy loans have affected quite a few of us.
>I've seen a not inconsequential chunk of my retirement investments go
>away because one mutual fund in my portfolio owned the likes of WaMu,
>Citigroup, Fannie Mae, and a bunch of other financial stocks.
>
>All those bad loans are connected to other bits and pieces of the
>financial system via derivatives and complex financial instruments the
>smart guys have been selling each other in increasing numbers over the
>past decade.
>
>At the end of last month Merrill Lynch unloaded a buttload of
>collateralized debt obligations -- derivatives whose value is tied
>ultimately to real estate loans-- for 22 cents on the dollar. The
>really smart guys who know more that I do about financial machinations
>sold CDOs originally valued at $30.6 billion to a Texas private equity
>fund for $6.7 billion. Four weeks prior to the sale Merrill valued
>the CDOs at $11.7 billion. Their estimate of the value of their
>investment declined $5 billion in four weeks. They can't tell what
>the damned things are worth anymore. The sale price is just a best
>guess at value.
>
>And there are more buttloads of CDOs out there weighing on the balance
>sheets of Wachovia et al. So far the housing/mortgage meltdown has
>led to an estimated $400 billion in write-downs across the financial
>industry. If a dollar's worth of CDOs is now worth 22 cents, then one
>analyst I've read believes there's gonna be more than twice that
>amount lost before the fat lady sings in this opera.
>
>When some dummy buys a house he can't afford and defaults on his ARM
>when it balloons on him, he's out. But that bad debt, secured by real
>estate that's worth less than the loan now that the bubble's burst,
>has legs. It walks with others of its kind through Byzantine webs of
>interconnected derivatives. When enough defaults happen, when paper,
>which is valued on the projection that (say) 90% of mortgage payments
>arrive on time, faces a world in which (say) 80% is a more realistic
>number, the CDOs and their kin don't look so tasty anymore.
>
>It's no wonder that no less an investing wizard than Warren Buffett
>called derivatives "financial weapons of mass destruction." In the
>current credit crisis nobody can tell what they're worth anymore. And
>the so-called over-the-counter trade in derivatives is largely
>un-regulated. The really smart guys who dealt them turned out to be
>just as clueless as the schlub who lost his house. They got Monopoly
>money mixed in with the real stuff and can't sort it back out.
>
>The S&P financials index has fallen 32% this year. So far. I've seen
>two years of gains in my retirement investments disappear. So far.
>
>There's a reason for regulations in the financial markets.

This is as succinct a description of the problem as I've seen.
I hope your retirement savings recover some of these losses.
I'm seeing a similar issue, although for me the still-mounting losses
have not yet wiped out the previous year's gains.

> Bush said the other day that Wall Street got drunk and now it
> has a hangover. I'd say it's time to find a bartender willing
> to cut the drunks off in time.

The problem is that most recovery proposals involve taking
actions that will prop up the value of U.S. residential properties
(mostly, by providing yet more money for real estate loans).
The idea is the property values need to be propped up, not
only to protect what's left of the CDO values, but so that
local governments have enough of a tax base. This is a particular
problem in California.

A secondary problem is that, since the federal government did
drop the ball on regulating this thing, the foreign investors
from Emirates or Singapore do not feel they should take a total
loss and the feds should step in with some cushion. I can't
exactly blame them for this. After all the feds were supposed
to be regulating loan originators and borrowers and they weren't.

Steve