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Finkel: No one really knows. That's unprecedented.(ZT)

(2007-07-18 22:49:05) 下一个
Finkel: No one really knows. That's unprecedented.

The Bear Sterns funds blew up because they counted on the synthetic CDOindexes to operate efficiently as a hedge. Finkel said way back inJanuary that these funds were going to lose their shirts that way.Following Finkel's advice may have saved Bear Sterns' investors a fewbillion.

Here are a few other predictions in the mortgage markets he made which have not yet appeared in the markets:
  • Buy-back obligations will lead to more bankruptcies among lenders - Many more lender bankruptcies to come
  • Major risks lurking in speculative and second homes - We arestarting to see this locally this summer on Cape Cod and other areas ofthe country where second homes dominate
  • Sound loans depend on market-priced housing values and accurateFICO scores, but both are gamed – Opening up yet another layer ofdefault risk in the mortgage market, in addition to no-doc/low-doc loans
  • Financial engineering will create problems when mark-to-modelbecomes marked to market – Not only ABS CDOs but the CLOs(Collateralized Loan Obligations) which have fueled the buyout boom
  • If housing decline 15% to 20% nation-wide, the mortgage securitiesmarket will be in dangerous, uncharted territory - Given the predictionby Case/Shiller of a more than 20% home price decline nationally, thereare many more mortgage securities re-pricings to come
Both the housing market and the market for the securities backed by home loans have a long way to go before reaching bottom.

The ABS mis-priced and mis-rated cat is out of the bag, but we see more"surprises" to come, as identified by triangulating on the opinions ofthe experts we interview in the context of our own view of how thefinancial and economy world really works. If Finkel's other predictionsof events which have not yet occurred are as prescient as his others,there are major market events lurking in the prices of stocks incompanies that have been levered up with debt over the past few years,and the banks that lent the money to finance the CLOs that banked thedeals:
  • Between 45% and 60% of all bank loans are going into PE deals via the CLO market
  • Private equity bubble is even bigger than mortgage bubble, and more serious macro-economic fallout is more likely
Are any of these upcoming "surprises" priced into the market? We doubt it.

The moral of the story is that the availability of the kind of information iTulip Selectreaders received six months ago was surely available to all marketparticipants had they sought it out. But information alone is notsufficient to create an efficient market.

Much has been said of the madness of crowds in a market bubble. Ourexperience is that optimistic beliefs that develop within a communityof bankers, fund managers, dealers, traders, consultants, and investorswhen vast sums of money are flowing during an asset bubble createsystemic mis-pricing and poor evaluation of risk within a market. Theavailability of apparently free money flowing for years on end distortsthe judgment of, not to mention the motive for accurate appraisals by,highly experienced professionals, a phenomenon we call The Desperate Optimism of the Invested.It is as likely to infect the professional holder of anynon-diversified, un-hedged or ineffectively hedged long position in anyasset in a sustained bubble market. It's not only the 24 year oldno-money-down real estatemogul during the housing bubble or gold-bug with most of his or her networth tied up in precious metals during an inflationary boom who issusceptible.

Whether a pro or an amateur, maintaining a disinterested and impartialperspective on the contents of one's portfolio may not be as much funas being a cheerleader for and true believer in a particular componentof it, but the practice will save you a lot of money and heartache.
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