From Doug Kass at thestreet.com comes this article on what's going on in the credit markets. Yes, 99% of people in America don't know, don't care and don't want to be bothered with all this financial mumbo jumbo CDO credit risk subprime blather...
But oh, how they will be bothered. How they wish they had paid attention.
The credit spigot is being turned off. No more cash-out refis. No more cash-back-at-close flips. No more Hummer H2s. No more trips to Greece. No more no-money-down-do-doc-interest-only loans. No more bidding wars on condos. And no more price appreciation on homes.
Damn this has all been prewritten, so there should be no surprises for HP'ers. It's like we have the playbook. And actually, we do.
The Next Shoe to Drop?
With the contagion that started in subprime mortgage lending now spreading to other mortgage tranches, as reported here, the next shoe to drop might well be in the broader securitization market.
Not only will older, less-protected packaged securitizations and other derivatives decline in price in a readjustment, but the entire credit securitization chain will become less profitable to industrial companies, mortgage lenders, banks and brokerages.
Consider what has occurred and is now occurring in subprime. The prices of mortgages are rising as the originations become less profitable for the financial intermediaries that serve the market. In turn, housing affordability worsens, delinquencies and foreclosures rise, housing inventories build further, and home prices drop in the second leg down for residential real estate.
This is the vicious cycle and contagion in credit markets.
Now I am hearing stories of plunging demand for CDO tranches and sponsors taking large fee-haircuts before deals can be sold. It is in the mixed asset class of CDOs where the contagion of subprime might soon spread as buyers recoil from sharper-than-anticipated losses in the mortgage market.
Credit spreads are flying open and the vicious cycle of credit has begun as the evaluation of risk is reassessed.
Given the sheer size and significance of the unregulated credit derivative markets, this is the kind of stuff that capital market crashes are made of.
Consider what has occurred and is now occurring in subprime. The prices of mortgages are rising as the originations become less profitable for the financial intermediaries that serve the market. In turn, housing affordability worsens, delinquencies and foreclosures rise, housing inventories build further, and home prices drop in the second leg down for residential real estate.
This is the vicious cycle and contagion in credit markets.
Now I am hearing stories of plunging demand for CDO tranches and sponsors taking large fee-haircuts before deals can be sold. It is in the mixed asset class of CDOs where the contagion of subprime might soon spread as buyers recoil from sharper-than-anticipated losses in the mortgage market.
Credit spreads are flying open and the vicious cycle of credit has begun as the evaluation of risk is reassessed.
Given the sheer size and significance of the unregulated credit derivative markets, this is the kind of stuff that capital market crashes are made of.
