Investment Landfill: Is Your Pension Fund a Dump for Toxic Waste?
June 30th, 2007Paul Tustain, the director of BullionVault, has written a special report on the Bear Stearns crisis.
You should know that Paul is in the business of making gold ownership simple and efficient for individual investors. You should also know that I am a BullionVault client.
Via: BullionVault (PDF):
It starts with the humble mortgage. Lots of people in the United States who have no money have borrowed 100% of the value of a house right at the top of a housing market which has since fallen sharply. These are the subprime borrowers.
The lenders, however, did not have to worry very much about the risk of default, because they rolled these mortgages into packages called Mortgage-Backed Securities, which they then sold. They got to be off-risk within a few weeks, because by then these bonds — backed by the homebuyers’ promise to repay their home loans each month, plus interest — belonged to other financial organizations.
But it is not always easy to sell a package of these Mortgage-Backed Securities (MBS). Selling such a product demands that the credit quality is assessed — and because the underlying lender is marketing to subprime borrowers, the package of debt in the MBS is heavily composed of mortgages quite likely to go into default. So a credit ratings agency will give it a low credit score.
This is where it pays to get a bunch of smart investment bankers involved…
This doesn’t seem to be a real problem for anyone who produces real goods or services. The Northern California market lost 8-12% in the last fiscal year, but the people who lost it had already had several years of highly profitable returns. The people who are losing money were gambling, and winning for a time. They had more than they needed to begin with and had a good streak, now things are back down to reality.
How convenient that so many Asians decided that the US was the place to shelter their money. The real estate agents and banks saw them coming and created casino style investment oportunities, call them Hedge funds or Securities, those aren’t a case of whiskey in the cellar.
The people who bought a home within their means to live in are fine, the people who bought several as investments are sad.
We had some low income people who bought zero down homes with ARMs. Well, they are back to renting.