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I don't think that you are missing anything that is known. And that is part of the problem. There are unknowns, the largest of which is that the banks and other institutions don't really even know what they own. Nor do they know what amount of default there will be.

Now, you are correct in that there will be some tranches which hold onto a value better than keeping money in a pillowcase. In particular, loans sold a few years ago or more are pretty good. Not only were they sold in an above board manner to people who could qualify for loans in an above board manner, but the houses were valued at a value more realistic than today's and they were 80% loans.

The last few years the 100% loans and the illicit paper fixing to get someone fundable put a dent in the system. And if it were just taking a hit for those percent of foreclosures (suspected to hit more than 2 million additional to the standard in the next two years) perhaps your paper would return to value after the panic.

But the houses were valued too high to begin with, just because of the easy money bubble. The foreclosures are going to force the house value down in every neighborhood, the fact that job loses are going to accelerate will take buyers out of the system which will force house prices down, the fact that only the most pristine buyers will be looked at will take more people out of the system, driving the prices down.

Suddenly, even if you had the truanch based upon the best properties and were able to sit out the panic portion of this problem, the houses in your portfolio are not worth 60% of what they were loaned at. Or worse.

I had a house that I bought in the 80s - put 50K in paint and a new kitchen so that I had 425,000 in it. Market collapsed.  Value was at less than 300K for a long time and didn't get up to 425 for a decade. If I had to sell (to follow a job, for example) or if there were a medical disaster (I was self employed, no insurance), that house would have been on the market and someone would have gotten a deal in your long run.

And that is how I think that the best AAA tranche is short term, incalculable dust, and the worst are sand through the fingers...you just can't hold out that long for something that is going to stay undervalued for the length of time it would take to "normalize".

And yet, many American corporations have a lot of cash, and have the ability to tighten up at home and sell more abroad. It will be an interesting game. So, what you are saying rdf about the houses might actually be true about the stock market...some parts might be a disaster, but they are not the majority and there are some parts that are just going to grow fine...though there are a lot of presumptions even in that (like, at which point can they just not afford to keep us old folks alive anymore on the high priced medicines and care that it will  take to do so?

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Mon Dec 17th, 2007 at 08:02:41 AM EST
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