Debacle In The Making 2

In case you thought that the subprime mortgages were solely to blame for high rates of default and the nervous jitters now surrounding the US economy, here’s something else to consider. In an article entitled “Why The Subprime Bust Will Spread” published in Asia Times Online on March 17, 2007, Henry C.K. Liu analysed the subprime contagion in the US and said:

"The nationwide proliferation of no-income-verification, interest-only, zero-equity and cash-out loans, while making financial sense in a rising market, is fatally toxic in a falling market, which will hit a speculative boom as surely as the sun will set. Since the money financing this housing bubble is sourced globally, a bursting of the US housing bubble will have dire consequences globally.

Through mortgage-backed securitization, banks now are mere loan intermediaries that assume no long-term risk on the risky loans they make, which are sold as securitized debt of unbundled levels of risk to institutional investors with varying risk appetite commensurate with their varying need for higher returns. But who are institutional investors? They are mostly pension funds that manage the money the US working public depends on for retirement. In other words, the aggregate retirement assets of the working public are exposed to the risk of the same working public defaulting on their house mortgages.

When a homeowner loses his or her home through default of its mortgage, the homeowner will also lose his or her retirement nest egg invested in the securitized mortgage pool, while the banks stay technically solvent. That is the hidden network of linked financial landmines in a housing bubble financed by mortgage-backed securitization to which no one until recently has been paying attention. The bursting of this housing bubble will act as a detonator for a massive pension crisis."

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved