It’s been hard for the bulls to just "sell in May and go away" in this market. Still, the Jim Cramer fan club had better remember that it’s not just lemmings that go over cliffs!
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Relevant Articles
- Economist: Malthus False Prophet [you don't make fun of 200 year old books if you're not scared witless] 5/15
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May 7th, 2007
May 7th, 2007
Securitization on Trial - Bert’s First Question
By John M.
AEI’s March 28, 2007 Subprime Seminar - III
- I - A Slightly Off-Beat Question, April 5, 2007
- II - Subprime Spillover Discussion - and a Bit of Business, April 7, 2007
Almost every homeowner knows that a mortgage is a complicated beast, but have you ever given a thought to the people who are putting up the money for that loan? In the "good old days," the money would have come from your neighborhood banker, and he would be getting that money from the deposits in the bank. Nowadays, however, it’s not that simple. Mortgages are pooled together and funded collectively. That process is called securitization, and it has become more and more complex over time. The people and institutions who are actually putting up the money these days are those who buy products like bonds that ultimately contain mortgages.
Just like it’s possible to get into a toxic mortgage where you don’t know you are getting in over your head, you might buy a "toxic bond" that is a riskier investment than you thought. Over at Calculated Risk, blogger Tanta has been posting a series [1] explaining the securitization process for Mortgage Backed Securities (MBS), and the most recent installment went into detail on how risk is distributed around. The AEI has been following this issue for some time, and at their March 28th seminar,[2] they discussed whether the present system conveys to the purchasers of bonds an honest picture of the risks those bondholders are taking on. That’s just the flip side of the predatory lending question.
Independent banking consultant Bert Ely is something of an institution at the American Enterprise Institute. Whenever they have a panel discussion on banking it is customary for him to ask the first question. This time he focussed on whether modern mortgage securitization has actually broken the essential linkage between risk and the ultimate lender.
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