who's the "liar"

For some time now, we have been hearing about “liars” loans – no documentation sub-prime mortgage applications. Pretty dumb thing for a mortgage company to do – “lending” (giving money) to someone who can’t or more likely, won’t provide information for assessing their ability to repay money (risk).

Then these mortgage loans were bundled up, securitized and sold. Who would be dumb enough to buy that “toxic waste”? Well a lot of folks, or at least their pension funds, or their wealth management team, as it happens. Why on earth would they do a thing like that?

I think it is disingenuous for a rating agency to explain the difference in paragraphs 457-503 in 7-point type and dense legalese in their disclosure document. Investors had (and should have) a certain level of expectation when the designation “AAA” is used. GE and Exxon types of expectations.
— John Mauldin

Then what?

  • “Some investors in the Enhanced Fund have offered to sell their positions for 11 cents on the dollar.” These are the smart folks heading for the exits with what they think they can get.
  • a few funds have “either stopped meeting redemptions or have shut down.” Problem with these not-so-liquid funds.
  • “a few banking institutions will end up being taken over as their balance sheets decline and make them vulnerable, but the mortgage losses will not directly put the system at risk” – these are pretty optimistic assumptions
  • “cash-out financing is going to drop, but in the grand scheme of things that is not a severe blow to the overall economy. ” Why am I getting this don’t-worry-your-pretty-little-head feeling about this?

There’s more – regulators, litigation, S&L type blow-ups likely, debit swap implosion… but I’ve had enough for now, thanks.