Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
OK, I'm willing to be educated.
I take a bunch of mortgages which mature in 30 years and have interest rate of, say, 8%. I sell these as a mortgaged-based security. The buyer has to expect less than 8% return, since the one doing the bundling has to take his cut.

Now this buyer doesn't really have the money to pay for this purchase so he buys on margin. How much is his lender going to provide and at what rate of interest? If this secondary lender charges more than 8% than the buyer of the bundle is a fool.

If this secondary lender charges less than 8% he is the fool, since he his not being compensated for his risk. You can keep bundling and reselling into as big a Ponzi scheme as you wish, but the principal remains the same.

Now the original bundle suffers a partial loss. I said 5-10% default. Does anyone have figures that indicate that the overall mortgage default market is going to exceed this?

Now the secondary lender gets cold feet and calls in the loan. The CBO buyer can't come up with the money - a liquidity problem. He is forced to sell at a loss. He loses money, so does the firm he borrowed from. Were their losses based upon the decline in value of the original mortgage pool?

I think not. So I'm on the side that says it's not a shortage of capital, it's a liquidity problem caused by panic. Are the banks having a real decline in income or are their "losses" just bookkeeping entries as they write down the value of the securities they can't sell or are forced to buy back?

What happens in a few years when these securities go back up in value as the panic passes? Who cleans up?

What am I missing?

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Sun Dec 16th, 2007 at 07:35:14 PM EST

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