Wall Street Doom & Gloom


Richard Moore

Original source URL:

July 31st, 2007
Doom & Gloom Nightly ‹ Your Sour Wall Street Source
Posted in Money, These United States by ed

This DOOM & GLOOM SCENARIO is brought to you by www.newcombat.net, where the 
glass is always empty ‹ Waiter?!

In light of the recent turmoil in the markets,

A FRIEND WROTE: So is this a turning point, a sea change, the beginning of high 
interest rates, low to no growth, maybe stagflation?

NEWCOMBAT ANSWER MAN: Yes. These things have been on the worry-horizon. Now they
will be realized.

FRIEND WROTE: Is this all Warren¹s fault?

(That is: Warren J. Spector, an old mutual college friend currently on the hot 
seat at Bear Stearns (BSC), where he is President and co-Chief Operating 
Officer. Bear had two ³hedge funds² specializing in mortgage bonds fail this 
past month, and today announced it has forbidden redemptions by investors in a 

ANSWER MAN: No. It is not Warren¹s fault. It seems he was a victim (paid, 
according to Forbes Online, about $35 million in 2006). A victim of a nationwide
network of venal mortgage brokers who bent rules to write mortgages for (i) 
³subprime² humans (FICO credit scores less than 650) and (ii) ³Alt-A² humans, 
like me, who don¹t have normal jobs and thus are sent to the ³Alt-A² mortgage 
pool when looking to gamble on real estate.

One of the spectacular failures is happening today. American Home Mortgage. 
(AHM). A specialist in Alt-A mortgage lending. Stock was trading at $20 two 
weeks ago; today closed at $1.04. You can get a chart to see what it looks like 


Also check out Countrywide (CFC), which specializes in subprime mortgages. And 
check out the titans of Wall Street. Merril Lynch (MER). Goldman Sachs (GS). 
Lehman Brothers (LEH). Bear Stearns (BSC). Barclays (BCS).

And Citibank (C). Bank of America (BAC). JPMorgan Chase (JPM). Wachovia (WB). 
Capital One (COF).

These boys are too big to fail (aren¹t theyŠ?). But they¹re not used to being 
pushed around like this.

The Dow Industrials were down 300 last Thursday, 200 on Friday. Up 80 yesterday.
Down 100 or so today. And it seems will be down several hundred tomorrow, at 
least in the morning, on the AHM failure.


ANSWER MAN: It¹s more than a typical ³liquidity² crisis (ala when the huge 
³hedge fund² Long Term Capital Management failed in late 90s).

The difference this time is that the mortgage-bond failures have demonstrated 
that the Rating Agency (Moody¹s, S&P, Fitch) ³models² (ie spreadsheets) for 
evalutaing and thus rating ³asset-backed securities² and other complex 
³structured finance² securities are seriously flawed.

The implosion nationwide of the housing market, following upon a great expansion
of credit under Greenspan (which expansion was possible in good part BECUASE of 
the ³asset-backed security² revolution that began in the 80s with the advent of 
personal computers and spreadsheets) ‹ this implosion, I say, was the first 
extreme test of the Rating Agency models, and they flunked.

I.e,. mortgage bonds rated AAA (the best) have been failing as wildly as the 
BBB- bonds (bottom rung of so-called ³investment grade²).

Upshot: The global finance system is loaded with more than a trillion dollars 
worth of these complex bonds and at the moment no one is sure what they¹re 

You won¹t hear this Rating Agency methodology problem talked about on CNN or in 
the Wall Street Journal yet. For now it¹s the mortgage bond failures and the 
failures these are causing among ³hedge funds² and the big lenders in the 
affected spheres.

But the rating methodology problem is the underlying failure, and it seems 
likely to cause riotous panic. (Unless everybody decides to ignore it. Say, via 
a Price Control program instituted by the Fed Š)

The mortgage and credit-card businesses rely ENTIRELY on their ability to sell 
the risk through asset-backed securities. If the market for those securities 
dries up (as it may well have already ‹ it¹s hard to tell because the markets 
are not public) ‹ the businesses will contract in ungodly fashion. Very hard to 
get a mortgage or credit card, unless you reside in Richistan and need neither.

Before it¹s over we may have to go back to the 1930s for a similar scenario re 
crisis credit contraction and its dire sequelae.

Ie I should sell my apartment yesterday.

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