Saturday, October 13, 2007

Buying Time with Play Money

If you are like me you are wondering how things on the economic front can seem to be ok when we are seeing the kinds of horrific data regarding the housing industry come out all the time, the answer can be partially found by reading this:
The article is pretty vague on details, and there are two reasons for that:
1. The details of this setup are not final
2. The details will never be fully known by design of those involved (hint: correct answer)

For a detailed explanation and great insightful discussion I direct you to Calulated Risk and the comments section of this thread:

My take away is that the really big bank Citigroup needs to hide the Enormous losses they hold on mortgage backed paper, and this setup will allow them to continue to mark those holding to some mythical value for a time. How long this can go on is any one's guess. Maybe it works for as long as they need it to. Maybe it does not. The main point is that for all the major banks and the US Treasury department to get involved, this is not a small "subprime only" minor niche market issue, but a systemic problem within the banking industry. I hope to be able to post more this coming week on this topic, but I imagine it will be kept very quiet.

The banks seem to be operating under the idea that by holding on for a while the assets they have may go back to a value that will not be so damaging to the bottom line. They gambled on risky mortgages. They gambled on rapid home price appreciation. They gambled on a never ending demand for the kinds of crap paper they were selling. All those gambles have lost, and lost big. Instead of taking their losses and moving on, the banks are doubling down and gambling on a turnaround in housing in the near term. They will lose that bet as well.

For something cool to watch for Saturday, check out this clip of the guitar duel from the movie "Crossroads" (no not the Britney Spears film). Ry Cooder and Steve Vai, ain't nuthin wrong with that!

Have a good rest of the weekend.

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