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The problem is the loan was junk to start. Plus, low pricing an ARMmakes sense when rates are up, but pricing it low when rates are atground zero is another matter. If they qualified these buyers onanything but the fully indexed rate, the stuff was junk to start. Backin the 1980's, people ran into trouble with ARM's and you might recallthat in good housing markets, prices were rising like they were inCalifornia this time around. Compensation was also rising fast and theyhad some idea that payments couldn't rise much more than 7.5%. I couldsee back then that if one took the worst case in a capped ARM that thebuyer was probably moving out into the street.
The best thingthat could happen over the long run is that these idiots go as broke asthey can go. The questions and answers are elementary ideas. I knowthese guys are probably PHD's and MBA's, but eggheads don't run theresl world. The problem with the mortgage business is clearly thatnon-mortgage people took over how it was operated. That is peoplesteeped in some kind of portfolio theory.
Portfolio Theoryused to be that you put a bunch of assets together to make sure youdidn't have a significant loss and could reap a high risk return. Nowit means you don't have a significant gain and reap a significant highrisk loss. The SPX is a portfolio. Where do you think it is going overthe next 20 years in real value from todays price? The dividend yieldis 1.79%. The reason is the past trend is projected for the portfolioand it is held like a risky asset that produces a risky return. Thereturn will be based on the 1.79% dividend and growth over time of thatdividend and nothing else. Historically, that will be less than therisk free rate of interest for money market assets. It is still beingpromoted like it is going to make 10% per annum.
At the peakof the last bull move in 2000, the 10 year treasury was yielding around6%, maybe even a little higher. Come March, zero coupon 10 year bondswould be worth roughly 1.593 times what was paid for them in 2000. TheSPX without management fees closed today at around 60 points below itspeak close in 2000. It has closed a little above its peak close in 2000in the past 6 months so lets suppose it equals what it was in 2000 attodays close. If the dividend averaged 1.4% (it was about 1.1% at thepeak and what I saw it was 1.79% at todays close based on some figure Isaw), the 1553 peak would have paid out roughly $182.63 in dividends.The 10 year treasury would have paid that out in 2 years($186.36) andthe last 2 years of principal would be worth over par. Plus, in a taxdeferred account, about 50% of the SPX could have also been accumulatedin the meantime.
The point here is these people are using somekind of protfolio risk on assets you can't mess around with like youcan the SPX. They are using leverage and they are pretending the riskon these assets in a pool doesn't exist. It is like a 6 foot manknowing he can carry 200 pounds strapped to his back across a 5 footdeep channel. This true as long as he doesn't step in a 2 foot deephole, at which point he drowns. Even in clear water, he might not beable to see the 2 foot hole. Then too, one must realize the SPX wasn'tleveraged 50% because if it was, the equity position was totally wipedout in the last down draft (The SPX dropped 50% of its peak in the lastbear. This one is going to be worse when it gets going).
Allthe pigs are in this slop. All classes of debt are in this slop. It isa joke to keep referring this as a subprime problem, as in subprimemortgages alone. That is a sustainable loss. Subprime credit, subprimeauto loans, subprime or junk bond corporate debt and declining qualityof all other classes of debt and no one left to catch them.
Oneof the big games is being run by people that think they can buy thisjunk and make out. Quite possibly they can, but as they wade into thechannel and take on the weight I mentioned above, they might find thebottom is muddy and they get stuck in place. At some point, i sensethese opportunists are going to find they can't unload this stuff andthe additional stuff that needs to be unloaded can't be bought.Remember, most of these people are following the same model.
The best thingthat could happen over the long run is that these idiots go as broke asthey can go. The questions and answers are elementary ideas. I knowthese guys are probably PHD's and MBA's, but eggheads don't run theresl world. The problem with the mortgage business is clearly thatnon-mortgage people took over how it was operated. That is peoplesteeped in some kind of portfolio theory.
Portfolio Theoryused to be that you put a bunch of assets together to make sure youdidn't have a significant loss and could reap a high risk return. Nowit means you don't have a significant gain and reap a significant highrisk loss. The SPX is a portfolio. Where do you think it is going overthe next 20 years in real value from todays price? The dividend yieldis 1.79%. The reason is the past trend is projected for the portfolioand it is held like a risky asset that produces a risky return. Thereturn will be based on the 1.79% dividend and growth over time of thatdividend and nothing else. Historically, that will be less than therisk free rate of interest for money market assets. It is still beingpromoted like it is going to make 10% per annum.
At the peakof the last bull move in 2000, the 10 year treasury was yielding around6%, maybe even a little higher. Come March, zero coupon 10 year bondswould be worth roughly 1.593 times what was paid for them in 2000. TheSPX without management fees closed today at around 60 points below itspeak close in 2000. It has closed a little above its peak close in 2000in the past 6 months so lets suppose it equals what it was in 2000 attodays close. If the dividend averaged 1.4% (it was about 1.1% at thepeak and what I saw it was 1.79% at todays close based on some figure Isaw), the 1553 peak would have paid out roughly $182.63 in dividends.The 10 year treasury would have paid that out in 2 years($186.36) andthe last 2 years of principal would be worth over par. Plus, in a taxdeferred account, about 50% of the SPX could have also been accumulatedin the meantime.
The point here is these people are using somekind of protfolio risk on assets you can't mess around with like youcan the SPX. They are using leverage and they are pretending the riskon these assets in a pool doesn't exist. It is like a 6 foot manknowing he can carry 200 pounds strapped to his back across a 5 footdeep channel. This true as long as he doesn't step in a 2 foot deephole, at which point he drowns. Even in clear water, he might not beable to see the 2 foot hole. Then too, one must realize the SPX wasn'tleveraged 50% because if it was, the equity position was totally wipedout in the last down draft (The SPX dropped 50% of its peak in the lastbear. This one is going to be worse when it gets going).
Allthe pigs are in this slop. All classes of debt are in this slop. It isa joke to keep referring this as a subprime problem, as in subprimemortgages alone. That is a sustainable loss. Subprime credit, subprimeauto loans, subprime or junk bond corporate debt and declining qualityof all other classes of debt and no one left to catch them.
Oneof the big games is being run by people that think they can buy thisjunk and make out. Quite possibly they can, but as they wade into thechannel and take on the weight I mentioned above, they might find thebottom is muddy and they get stuck in place. At some point, i sensethese opportunists are going to find they can't unload this stuff andthe additional stuff that needs to be unloaded can't be bought.Remember, most of these people are following the same model.
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