"Katty K" <katty[at]ak74.algebra.com> , kay[at]ananzi.co.cn wrote:

- quote -

The whole subprime mortgage situation feels allot like the derivatives situation
in the 80's. There will be a few highly publicized failures (e.g. Orange
County, California in the 80's), some small pain spread more broadly, but
nothing of dire consequence. The subprime mortgage market is a small part of
our overall financial markets.

While I think the failure rate of subprime mortgages will be fairly high (maybe
15-25%), it will be nowhere near 100%. Even the failed mortgages will recover a
significant portion of the loan in foreclosure (maybe 75-90%). If that is true,
only the most risky tranches will lose.

In general, it is a *very* bad idea to move significant portions of your assets
based on some scary article.

-- Doug

-- Doug

Katty K wrote:

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I think there is an issue with sub-prime loans. Any home valued at the
top of the market and financed with high loan to value ratios are at
risk. But what Jim Jubak is discussing in your linked story are CMOs,
collateralized mortgage obligations, and not just the vanilla variety.
Standard securitization of loans creates a pool a loans, say 100 loans,
totaling $50M. This $50M gets sliced and sold. In theory, the instrument
created can last 30 years, although their duration is typically less
than 5 as a result of refinancing. But, every customer for this debt
buys the same thing. The CMOs as described offer different levels of
risk by slicing off different pieces of the debt. You'd easily
understand that the return of the first, say $10M, has little risk, as
even after defaults, there's a payment stream of $3-$4M in interest
alone. It's the back end slices that get risky and have the highest risk
of total default. Easy to see that from day one, the very last few
million has a low chance of return, as it contains the highest defaults,
by design.

Why do you think this will spill into the government market? As these
defaults occur wouldn't the market rush into safer products and bid up
the price of government securities? And with most US companies net
borrowers, not lenders, the stock market itself, while not immune,
shouldn't have a particularly large reaction to the sub-prime meltdown.
Jim makes some implications, but then doesn't close on his reasoning.
Mentions IBM, but IBM is a borrower, not a buyer of CMOs.

Just my thoughts on this.
JOE

is the writer of this article realistic and particularly in describing the
risk spread, which is clearly missing due to cost in the event of a 100%
cascading failure

http://articles.moneycentral.msn.com...oseToHome.aspx

that would mean short-term gov bonds as well as pretty much any class of
mutual fund would take a severe hit

all comments welcome as am seriously considering moving all 401k and IRA
assets to either very short-term bonds or money market type mutual funds
(not sure if even these would escape?)