I'm making it a point to educate myself in understanding the sub-prime mortgage ticking time bomb. My hypothesis is this: Sub-prime is a symptom of something much larger. It represents a vast ocean of money in search of yield. To meet the demand for yield, a preponderance of structured debt obligations were created. It represents the shifting of risks from the traditional holders to a broader base of holders who may be holding instruments in which all of the opportunity has been wrung out in terms of fees for all of the specialized handlers but none of the risk has been mitigated or perhaps even fairly reflected in the yield.
As I share this information with you, I will ascribe credit to the sources that I use, and as always, qualify my opinion on (as well as my ability to research) such matters as being woefully constrained by my general ignorance in how these sophisticated instruments work. What is becoming apparent to me, and I have no wish to disparage any party, is that this environment has been a very fee rich environment where the rewards are great and the risks (except to the ultimate purchasers of these obligations) are small. I'm willing to bet that the re-packaging of this risk and distributing it downstream eliminated the traditional safety valves that would have curtailed continued lending. In this fee rich/risk free environment, ordinary prudence was hit over the head and wrapped in a rug. Well, there are quite a few of these ordinary prudence corpses strewn about, and the air will begin to fill with the stench of them. I think we got our first whiff this past week. I'll also add...this stuff makes my head hurt.
Now, there are lots of people in the food chain of the structured debt obligations. My goal is not to provide an exhaustive detailing of that, but rather I'll provide you with links to resources along the way. My first recommendation is that you read Wikipedia's entry for collaterized debt obligations and mortgage backed securities. If you are balking at reading Wiki's entry, let me remind you that this knowledge is part of your continued erudition AND you will be the center of attention at your next cocktail party as you explain to others about the potential problems involved. Seriously folks, I believe that this will be as troublesome as the junk bond fiasco. So as a citizen, take 20 minutes to educate yourself. Yen carry trade--laugh at it. I don't think it is anything compared to the possible unwinding of these structured debt obligations. My greatest hope? That I'm wrong.
My first bit of research is to provide you with the following table. It is only slightly amended from the original table which you can find referenced within the table. While there are other types of asset back securities, I chose to limit the table to mortgage-related issues. This table shows the people who have insured the securities. in addition to sizing the total market for 2005 and 2006. As you can see (and presuming my understanding is correct) less than 5% of the total amount issued has been insured. You may also find it interesting to note that FGIC (Fidelity Guaranty Insurance Company is owned partially by Blackstone).
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