My new favorite blog is Calculated Risk.
They quote the Wall Street Journal:
Investors received a letter earlier this week from Braddock Financial Corp. of Denver. It said it was closing its Galena Street Fund, which mainly invests in bonds backed by subprime mortgages extended to borrowers with poor credit, and suspending redemptions until it can sell assets in the roughly $300 million fund.
Is Colorado just the next victim of the Subprime Mortgage pinch?
I know this is mind numbing economics stuff, but as Calculated Risk documents on a daily basis, there's a huge sector of our economy that's teatering on the brink of a disaster comparable to the S&L bailouts of Bush I.
So for those new to this, here's the crash course on what's going on:
- After 9/11 and the Dot Com bust, Alan Greenspan and the Federal Reserve lowered interest rates to unprecedented rates for an equally unprecedented time to stave off recession.
- This made borrowing money very cheap, lowering interest rates for mortgages, home equity loans, and any other loans to historic lows.
- Mortgage brokers marketed and invented new kinds of mortgage loans--the "adjustable rate mortgage", the "interest only" mortgage--to qualify unworthy debtors in to larger and larger houses.
- Housing prices began to rise at ridiculous, double digit rates because getting a loan was very, very easy. This significantly increased the pool of potential buyers, pushing up demand, and increasing prices.
- Hedge Funds (like Braddock) started hawking investments comprised of "CDOs"--Collateralized Debt Obligations--which are basically mutual funds made up of thousands of mortgages bundled together as a bond, promising ridiculous returns on investments with little to no risk.
- Turns out all these houses aren't really worth what we thought. Turns out housing prices are going down, and the number of unsold homes is now at a record high.
- Not only that, turns out all these people with "questionable credit" can't pay for their loans. Foreclosures and defaults are at an all time high and all these fancy loans are now "resetting" causing once low mortgage payments to suddenly double. Most expect defaults and foreclosure to continue.
So why should you care? Simple. Rich people are losing money. Just the other day Bear Sterns, the alpha dog in the CDO market, had to admit to a $3.2 billion bail out of one of their subprime mortgage funds to prevent a complete collapse.
If there's anything history teaches us its that the rich only love the free market until it actually effects them. Once rich people who take indefensible risks start losing billions it's suddenly a national crisis. They start whining and crying and complaining about the "crisis", and suddenly me, you, and every John Q. taxpayer gets stuck with the tab for their unconscionable binge.
So why do I write this post. Well, for one, it's in support of Boulder County's crusade against the McMansion.
And the other point: This CDO and subprime mortgage market is only going down. The powers that be are already expecting us taxpayers to bail them out. And, to be blunt, I say fuck that.
We average citizens have already paid billions to bail out the failures of the over zealous, selfish, profit mongers on Wall Street. And I must do everything in my power to prevent this CDO and subprime mortgage "crisis" from becoming another taxpayer buyout of the greedy.
x-posted @ SquareState.net