Interesting to see the mainstream media start to pick this up and
speak. Nice to see some commentary from someone that may not be
selling precious metals.

Subprime credit crisis? Just the tip of the iceberg, folks.

You can pat your elitist monkey masters on the back and say, "Thank
you very much" just before you line them up against a wall a few years
from now.......................


It's Not 1929, but It's the Biggest Mess Since

http://www.washingtonpost.com/wp-dyn/content/article/2007/12/04/AR2007120402186_pf.html

By Steven Pearlstein
Wednesday, December 5, 2007; D01


It was Charles Mackay, the 19th-century Scottish journalist, who
observed that men go mad in herds but only come to their senses one by
one.

We are only at the beginning of the financial world coming to its
senses after the bursting of the biggest credit bubble the world has
seen. Everyone seems to acknowledge now that there will be lots of
mortgage foreclosures and that house prices will fall nationally for
the first time since the Great Depression. Some lenders and hedge
funds have failed, while some banks have taken painful write-offs and
fired executives. There's even a growing recognition that a recession
is over the horizon.

But let me assure you, you ain't seen nothing, yet.

What's important to understand is that, contrary to what you heard
from President Bush yesterday, this isn't just a mortgage or housing
crisis. The financial giants that originated, packaged, rated and
insured all those subprime mortgages were the same ones, run by the
same executives, with the same fee incentives, using the same
financial technologies and risk-management systems, who originated,
packaged, rated and insured home-equity loans, commercial real estate
loans, credit card loans and loans to finance corporate buyouts.

It is highly unlikely that these organizations did a significantly
better job with those other lines of business than they did with
mortgages. But the extent of those misjudgments will be revealed only
once the economy has slowed, as it surely will.

At the center of this still-unfolding disaster is the Collateralized
Debt Obligation, or CDO. CDOs are not new -- they were at the center
of a boom and bust in manufacturing housing loans in the early 2000s.
But in the past several years, the CDO market has exploded, fueling
not only a mortgage boom but expansion of all manner of credit. By one
estimate, the face value of outstanding CDOs is nearly $2 trillion.

But let's begin with the mortgage-backed CDO.

By now, almost everyone knows that most mortgages are no longer held
by banks until they are paid off: They are packaged with other
mortgages and sold to investors much like a bond.

In the simple version, each investor owned a small percentage of the
entire package and got the same yield as all the other investors. Then
someone figured out that you could do a bigger business by selling
them off in tranches corresponding to different levels of credit risk.
Under this arrangement, if any of the mortgages in the pool defaulted,
the riskiest tranche would absorb all the losses until its entire
investment was wiped out, followed by the next riskiest and the next.

With these tranches, mortgage debt could be divided among classes of
investors. The riskiest tranches -- those with the lowest credit
ratings -- were sold to hedge funds and junk bond funds whose
investors wanted the higher yields that went with the higher risk. The
safest ones, offering lower yields and Treasury-like AAA ratings, were
snapped up by risk-averse pension funds and money market funds. The
least sought-after tranches were those in the middle, the "mezzanine"
tranches, which offered middling yields for supposedly moderate risks.

Stick with me now, because this is where it gets interesting. For it
is at this point that the banks got the bright idea of buying up a
bunch of mezzanine tranches from various pools. Then, using fancy
computer models, they convinced themselves and the rating agencies
that by repeating the same "tranching" process, they could use these
mezzanine-rated assets to create a new set of securities -- some of
them junk, some mezzanine, but the bulk of them with the AAA ratings
more investors desired.

It was a marvelous piece of financial alchemy, one that made Wall
Street banks and the ratings agencies billions of dollars in fees. And
because so much borrowed money was used -- in buying the original
mortgages, buying the tranches for the CDOs and then in buying the
tranches of the CDOs -- the whole thing was so highly leveraged that
the returns, at least on paper, were very attractive. No wonder they
were snatched up by British hedge funds, German savings banks, oil-
rich Norwegian villages and Florida pension funds.

What we know now, of course, is that the investment banks and ratings
agencies underestimated the risk that mortgage defaults would rise so
dramatically that even AAA investments could lose their value.

One analysis, by Eidesis Capital, a fund specializing in CDOs,
estimates that, of the CDOs issued during the peak years of 2006 and
2007, investors in all but the AAA tranches will lose all their money,
and even those will suffer losses of 6 to 31 percent.

And looking across the sector, J.P. Morgan's CDO analysts estimate
that there will be at least $300 billion in eventual credit losses,
the bulk of which is still hidden from public view. That includes at
least $30 billion in additional write-downs at major banks and
investment houses, and much more at hedge funds that, for the most
part, remain in a state of denial.

As part of the unwinding process, the rating agencies are in the midst
of a massive and embarrassing downgrading process that will force many
banks, pension funds and money market funds to sell their CDO holdings
into a market so bereft of buyers that, in one recent transaction, a
desperate E-Trade was able to get only 27 cents on the dollar for its
highly rated portfolio.

Meanwhile, banks that are forced to hold on to their CDO assets will
be required to set aside much more of their own capital as a financial
cushion. That will sharply reduce the money they have available for
making new loans.

And it doesn't stop there. CDO losses now threaten the AAA ratings of
a number of insurance companies that bought CDO paper or insured
against CDO losses. And because some of those insurers also have
provided insurance to investors in tax-exempt bonds, states and
municipalities have decided to pull back on new bond offerings because
investors have become skittish.

If all this sounds like a financial house of cards, that's because it
is. And it is about to come crashing down, with serious consequences
not only for banks and investors but for the economy as a whole.

That's not just my opinion. It's why banks are husbanding their cash
and why the outstanding stock of bank loans and commercial paper is
shrinking dramatically.

It is why Treasury officials are working overtime on schemes to stem
the tide of mortgage foreclosures and provide a new vehicle to buy up
CDO assets.

It's why state and federal budget officials are anticipating sharp
decreases in tax revenue next year.

And it is why the Federal Reserve is now willing to toss aside
concerns about inflation, the dollar and bailing out Wall Street, and
move aggressively to cut interest rates and pump additional funds
directly into the banking system.

This may not be 1929. But it's a good bet that it's way more serious
than the junk bond crisis of 1987, the S&L crisis of 1990 or the
bursting of the tech bubble in 2001.

Interesting to see the mainstream media start to pick this up and
speak. Nice to see some commentary from someone that may not be
selling precious metals.

Subprime credit crisis? Just the tip of the iceberg, folks.

You can pat your elitist monkey masters on the back and say, "Thank
you very much" just before you line them up against a wall a few years
from now.......................

It's Not 1929, but It's the Biggest Mess Since

http://www.washingtonpost.com/wp-dyn/content/article/2007/12/04/AR20071
20402186_pf.html

By Steven Pearlstein
Wednesday, December 5, 2007; D01


It was Charles Mackay, the 19th-century Scottish journalist, who
observed that men go mad in herds but only come to their senses one by
one.

We are only at the beginning of the financial world coming to its
senses after the bursting of the biggest credit bubble the world has
seen. Everyone seems to acknowledge now that there will be lots of
mortgage foreclosures and that house prices will fall nationally for
the first time since the Great Depression. Some lenders and hedge
funds have failed, while some banks have taken painful write-offs and
fired executives. There's even a growing recognition that a recession
is over the horizon.

But let me assure you, you ain't seen nothing, yet.

Interesting to see the mainstream media start to pick this up and
speak. Nice to see some commentary from someone that may not be
selling precious metals.

Subprime credit crisis? Just the tip of the iceberg, folks.

You can pat your elitist monkey masters on the back and say, "Thank
you very much" just before you line them up against a wall a few years
from now.......................

It's Not 1929, but It's the Biggest Mess Since

http://www.washingtonpost.com/wp-dyn/content/article/2007/12/04/AR200...

By Steven Pearlstein
Wednesday, December 5, 2007; D01

It was Charles Mackay, the 19th-century Scottish journalist, who
observed that men go mad in herds but only come to their senses one by
one.

We are only at the beginning of the financial world coming to its
senses after the bursting of the biggest credit bubble the world has
seen. Everyone seems to acknowledge now that there will be lots of
mortgage foreclosures and that house prices will fall nationally for
the first time since the Great Depression. Some lenders and hedge
funds have failed, while some banks have taken painful write-offs and
fired executives. There's even a growing recognition that a recession
is over the horizon.

But let me assure you, you ain't seen nothing, yet.

What's important to understand is that, contrary to what you heard
from President Bush yesterday, this isn't just a mortgage or housing
crisis. The financial giants that originated, packaged, rated and
insured all those subprime mortgages were the same ones, run by the
same executives, with the same fee incentives, using the same
financial technologies and risk-management systems, who originated,
packaged, rated and insured home-equity loans, commercial real estate
loans, credit card loans and loans to finance corporate buyouts.

It is highly unlikely that these organizations did a significantly
better job with those other lines of business than they did with
mortgages. But the extent of those misjudgments will be revealed only
once the economy has slowed, as it surely will.

At the center of this still-unfolding disaster is the Collateralized
Debt Obligation, or CDO. CDOs are not new -- they were at the center
of a boom and bust in manufacturing housing loans in the early 2000s.
But in the past several years, the CDO market has exploded, fueling
not only a mortgage boom but expansion of all manner of credit. By one
estimate, the face value of outstanding CDOs is nearly $2 trillion.

But let's begin with the mortgage-backed CDO.

By now, almost everyone knows that most mortgages are no longer held
by banks until they are paid off: They are packaged with other
mortgages and sold to investors much like a bond.

In the simple version, each investor owned a small percentage of the
entire package and got the same yield as all the other investors. Then
someone figured out that you could do a bigger business by selling
them off in tranches corresponding to different levels of credit risk.
Under this arrangement, if any of the mortgages in the pool defaulted,
the riskiest tranche would absorb all the losses until its entire
investment was wiped out, followed by the next riskiest and the next.

With these tranches, mortgage debt could be divided among classes of
investors. The riskiest tranches -- those with the lowest credit
ratings -- were sold to hedge funds and junk bond funds whose
investors wanted the higher yields that went with the higher risk. The
safest ones, offering lower yields and Treasury-like AAA ratings, were
snapped up by risk-averse pension funds and money market funds. The
least sought-after tranches were those in the middle, the "mezzanine"
tranches, which offered middling yields for supposedly moderate risks.

Stick with me now, because this is where it gets interesting. For it
is at this point that the banks got the bright idea of buying up a
bunch of mezzanine tranches from various pools. Then, using fancy
computer models, they convinced themselves and the rating agencies
that by repeating the same "tranching" process, they could use these
mezzanine-rated assets to create a new set of securities -- some of
them junk, some mezzanine, but the bulk of them with the AAA ratings
more investors desired.

It was a marvelous piece of financial alchemy, one that made Wall
Street banks and the ratings agencies billions of dollars in fees. And
because so much borrowed money was used -- in buying the original
mortgages, buying the tranches for the CDOs and then in buying the
tranches of the CDOs -- the whole thing was so highly leveraged that
the returns, at least on paper, were very attractive. No wonder they
were snatched up by British hedge funds, German savings banks, oil-
rich Norwegian villages and Florida pension funds.

What we know now, of course, is that the investment banks and ratings
agencies underestimated the risk that mortgage defaults would rise so
dramatically that even AAA investments could lose their value.

One analysis, by Eidesis Capital, a fund specializing in CDOs,
estimates that, of the CDOs issued during the peak years of 2006 and
2007, investors in all but the AAA tranches will lose all their money,
and even those will suffer losses of 6 to 31 percent.

And looking across the sector, J.P. Morgan's CDO analysts estimate
that there will be at least $300 billion in eventual credit losses,
the bulk of which is still hidden from public view. That includes at
least $30 billion in additional write-downs at major banks and
investment houses, and much more at hedge funds that, for the most
part, remain in a state of denial.

As part of the unwinding process, the rating agencies are in the midst
of a massive and embarrassing downgrading process that will force many
banks, pension funds and money market funds to sell their CDO holdings
into a market so bereft of buyers that, in one recent transaction, a
desperate E-Trade was able to get only 27 cents on the dollar for its
highly rated portfolio.

Meanwhile, banks that are forced to hold on to their CDO assets will
be required to set aside much more of their own capital as a financial
cushion. That will sharply reduce the money they have available for
making new loans.

And it doesn't stop there. CDO losses now threaten the AAA ratings of
a number of insurance companies that bought CDO paper or insured
against CDO losses. And because some of those insurers also have
provided insurance to investors in tax-exempt bonds, states and
municipalities have decided to pull back on new bond offerings because
investors have become skittish.

If all this sounds like a financial house of cards, that's because it
is. And it is about to come crashing down, with serious consequences
not only for banks and investors but for the economy as a whole.

That's not just my opinion. It's why banks are husbanding their cash
and why the outstanding stock of bank loans and commercial paper is
shrinking dramatically.

It is why Treasury officials are working overtime on schemes to stem
the tide of mortgage foreclosures and provide a new vehicle to buy up
CDO assets.

It's why state and federal budget officials are anticipating sharp
decreases in tax revenue next year.

And it is why the Federal Reserve is now willing to toss aside
concerns about inflation, the dollar and bailing out Wall Street, and
move aggressively to cut interest rates and pump additional funds
directly into the banking system.

This may not be 1929. But it's a good bet that it's way more serious
than the junk bond crisis of 1987, the S&L crisis of 1990 or the
bursting of the tech bubble in 2001.