Let me see if I can explain the current financial meltdown as I think it is happening. My perceptions are based on reading only public information and there is certainly a great deal that I am unaware of. I’m not a current market trader, just an interested observer. I have no professional qualifications and I’m not your financial adviser. Just so we’re clear, and if you think I need to be corrected on anything feel free to do so in the comments.
Mortgage lending corporations (what used to be called S&L’s) have been making bad loans on bad credit for homes by giving some percentage against the entire value of the home, on the expectation that a default would likely occur and they would acquire the real estate at a substantial discount.
Now the loans themselves are not valuable, they are just paper which they don’t expect repayment on.
But the mortgage lenders have taken this paper and labeled it subprime, and sold it.
Somewhere along the line, they are going to expect you to bail them out.
Aug. 15 (Bloomberg) — The risk of owning corporate bonds rose after a Merrill Lynch & Co. analyst said Countrywide Financial Corp., the biggest U.S. mortgage lender, may have to file for bankruptcy.
Credit-default swaps on Countrywide widened after Merrill Lynch analyst Kenneth Bruce raised the possibility that a loss of access to short-term loan markets could force Countrywide into bankruptcy. Contract prices for mortgage lender Residential Capital LLC and for home-loan insurer Radian Group Inc. are also trading as if investors see a high probability of default.
“This market is feeling awfully similar to the fall of 1998” when Russia defaulted on its debt and banks had to bail out hedge fund Long Term Capital Management, said Bruce, who is based in San Francisco. Bruce downgraded Countrywide’s stock to “sell” from “buy” in a research note today.