Friday, September 11, 2009

A new buzzword to learn

It's always a challenge for us lay people to keep up with terminology.We now have a new addition to the list.Re-Remic.Learn it.Live it.Love it.

It stands for "resecuritization of real estate mortgage investment conduits".This is the lipstick on the pig for the toxic debt that brought about the housing industry collapse.Remember CDO's,or collaterized debt obligations?We had to learn that one as well.All of these financial vehicles are simply ways to repackage risky debt and make it attractive to investors.Toss in a willing accomplice in the form of a bond rating agency that will rate it "AAA" and we're off and running again down the road to re-inflating the housing bubble.

Now,they mix in some good mortgages with the bad to spread the risk.In theory,those buying the riskiest bets are made aware of this and realize they get paid last.Gee,wasn't that the way it was supposed to work with the automaker bankruptcies?Except that the senior bondholders were thrown out on the keesters thanks to Obama.

At any rate,let's give the benefit of the doubt just for arguments sake.Let's say everyone knows what they're buying.Fine.Can someone explain to me how that reduces the risk?The only difference between now and prior to the bubble collapse is awareness of risk.We had pension funds and local governments worldwide investing in what they thought were safe bets due to the AAA ratings.Now these same investors will know that are buying the same old toxic debt that was never flushed out and removed from the books of these mortgage holding entities.And if these homeowners can't make their mortgage payments,the system collapses again.Only this time,investors should feel better knowing ahead of time that are losing their retirements with eyes wide open.Payday has to happen.The toxic debt must be removed from the system for it to ever heal.

We now know that it's not the subprime mortgages defaulting these days.It's the good mortgages failing due to unemployment.Unemployment is still climbing and projected to remain in double digits for years by everyone.So,it doesn't take a rocket scientist to see that the defaults will continue to escalate and trigger the next wave.And this doesn't even take into account the commercial mortgage crisis which is still awaiting.Do yourself a favor and read Harry Dents' "Great Depression Ahead".He predicted all of this ahead of time and it's falling into place quite nicely.More to come...

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