July 02, 2007

Here's Fleckenstein on CDOs and "spinning straw into gold"

Anyone want to make any predictions on how this whole flim-flam CDO game implodes from here? The Bears Stearns blow up was the first major crack in the ice, but when does the whole thing give in, and what does that look like?

Here's Fleck:

The housing bubble and the housing ATM were built on fantasy. They were driven by Wall Street's ability to take any and all mortgages, package them up and turn them essentially into high-grade securities.

It was like the medieval notion of spinning straw into gold: Wall Street alchemists wanted volume, and they got it -- assembling trillions of dollars' worth of mortgage paper that probably should never have been created, certainly not under the terms as structured.

One day when we look back on this period, I believe we'll shake our heads and say it was all so obvious. Then we'll ask: What was the stock market "thinking" when it viewed itself as an entity that reality couldn't touch?

9 comments:

Horatio said...

The CDO tranche ratings fraud is AMAZING chicanery!

To sell worthless liar loans as AAA, wow! And the chumps buying this stuff knew about it!? Hard to beleive I am witnessing Enron2.

People with private pensions are scrooed. Im looking at you California Teachers fund!

lucky me i have no pension so i wont make mistake of relying on what wont be there.

Kieth how do i short a pension fund?!?

Anonymous said...

Yes the Bush bust is comin' along right on time...

Anonymous said...

Were we're thinking just for today screw tomorrow! That is the American way. Now lets spread this throughout the world.

Anonymous said...

D-day is July 16

NEW YORK, July 2 (Reuters) - Bear Stearns Cos. (BSC.N: Quote, Profile , Research) may take until July 16 to tally losses at two struggling hedge funds that invested in risky mortgage-related securities, The Wall Street Journal Online reported on Monday.

The process of calculating the funds' net asset value is taking longer than usual because the securities in which the funds invested are thinly traded and the market for them has been volatile, according to the Journal, which cited a letter to investors from Bear Stearns' asset-management arm.

Investors are keen to see how far the assets have fallen, since they believe other hedge funds are also holding mortgage-related securities, the report added.

jellybelly said...

"the securities in which the funds invested are thinly traded and the market for them has been volatile"

TRANSLATION: We sold this used toilet paper to a couple of fools, and now they want their money back.

The basic problem is the amount of available credit has to keep increasing or the system will collapse. When credit is removed from the system (like when these deals unravel), then twice as much replacement debt has to be injected just to maintain the status quo.

RJ said...

jellybelly said:
"The basic problem is the amount of available credit has to keep increasing or the system will collapse. When credit is removed from the system (like when these deals unravel), then twice as much replacement debt has to be injected just to maintain the status quo."

---------------------------------

You nailed it. Our current financial system requires perpetual growth. Since infinite growth is impossible, at some point the system has to implode. One of the main causes for this implosion will be the natural limits on global energy production. We've pretty much hit the wall which means global economic expansion will begin to decelerate in real terms within the next couple of years. Once that happens, our credit based financial systems will begin to collapse. China and India got into the industrial revolution about a hundred years too late. They're having a great run but it won't last. We need a return to capitalism based on savings of real assets which would never have allowed the overexpansion of our artificially inflated economies in the first place. I hope the endgame doesn't get too ugly.

Anonymous said...

We live in a neighborhood of $500K to $750K houses, upscale I suppose because the average around here is $250K. The house next door is in preforeclosure. The mortgage company gave the renters two weeks to clear out, and they were pissed because the FB owner never told them he was in trouble. The renters were decent types, older tradesmen, no kids, no parties or noise.

Now the place sits vacant, yard going to seed, and I can't see them getting anywhere near Zillow's estimated price of $443K when it hits the auction block.

Anonymous said...

"People with private pensions are scrooed. Im looking at you California Teachers fund!"

Actually, the taxpayer who will bail out the public sector workers is screwed. Don't expect the civil servants to take a haircut, do you?

Anonymous said...

Im afraid that America IS an Enron.
The whole god damn thing.

And GOOD RIDDENCE !!!