The Formula That Killed Wall Street The above poster has it right. If it was just the default rate on loans causing the problem, then today would be considered a repeat of the S&L of the late 80's. The packaging and usage of leverage is what makes this time period so much different. In the end, it's likely the banks will be RTC'd in form or another. The above article is an interesting read on the guy some will really blame for this mess.
To amplify what was just posted - this is not a credit crisis - it is a future asset price crisis. We just had 10 years of baloney and everyone with the money to lend knows that 3-5 years from now when he hit bottom we are going to go back to the previous structure where money was earned and risk premium was high. If people want money for risk ventures they will be paying 4 points or more on top of a typical mortgage rate even for secured deals. They will less deals. Less business less people making 6 figures. Less dopes on wall street making millions. Greenwich will go back town where people who own businesses will be able to buy houses and movie stars will be able to houses on the water. There is going to be a lot less stupid money. The market knows that. We are going back to early to mid 90s valuations. The stock market is reflecting that knowledge. Its not just fear of toxic assets and AIG - its real world valuations and real world expectations. When the market starts to believe the greatest depression is coming... which it may because lately Obama's team seems like clowns. We will see Dow 3500 or lower.
Having trouble finding relevent recent articles right now but those figures sound way-off. http://online.wsj.com/article/SB123565300722281697.html
Question: To evaluate future US economy as a whole, do we look on the stock index or the currency? The USD is getting stronger against some major currencies as a hint that US economy will be fine.
Mark to market has created a self fulfilling prophecy. All markets have collapsed following the credit market turmoil , credit ratings were destroyed further with the stockmarket collapse, and the credit crunch got worse, companies went out of business sending thousands to collect unemployment benefits. It's my understanding, noone is buying "toxic" mortgage securities because the banks aren't willing to sell them at firesale prices. They must know what it's worth better than speculators. Also investors are sheeps and are scared to death now. Pretty soon we'll have no other choice than suspending M2M. As for the market "anticipating" higher default rates, I think it overshot way too much on the downside. There is no way that default expectations shooting up so fast , and the Dow being cut in HALF in 16 months are reflecting anticipation by the market . Market was oblivious to risk now it's clairvoyant ? Give me a break. Something else is at play, sheer panic but above all the govt screwed up with the markets when they banned shortselling , we wouldn't have had that type of decline without that type of govt intervention IMO . They screwed everybody .
I apologize. I must be mistaken. How did I not see that surely you know better than all people who are actually trading this stuff.
those toxic assets are not worth shit now or for the next 10 years. the investors are scared. Collection lawyers are not bidding for them because many of those loans are non recourse loans and or the loans to people who will never have the money to pay them back. it is not a credit crisis - it is an asset reality. We have a reality crisis. The longer the jerk off in washington get away with calling this a credit crisis, the more of our taxpayer trillions will get flushed. Prices are down 30 to sixty percent in CA and FL and there is still a ton of inventory. We will be back to mid to early 90s pricing when this is done. Parts of CA and FL are hitting 80s pricing. Those seconds for which I hear the price of 22 cents on the dollar being bandied about. Were really about 7 cents on the dollar plus non recourse loan for the rest of the 22 cents. That was a high price at the time. Those assets are worth less now. Why are you assuming hedge funds and lawyers would not come in and scoop those assets up if they were being offered at a profitable discount. The market is functioning fine. The assets are being properly valued. The banks just do not wish to accept reality. Those assets are never going to get back to higher prices unless they can inflate buyers pay checks.