Let the US ecomony “collapse” such that consumers buckle down, start saving, refuse to buy a new car from Japan every 1.4 years, put off or avoid buying the tons of junk from China year after year after year. Christ, even the statisticaly “poor” American families have more living space, a vehicle (sometimes two), home PC, colour flat screen etc etc. This is the “poor” segment of socienty mind you! That is what keeps Chinese workers employed and by extension, German and Italian workers who supply them with industrial machine parts, etc etc.

I say let the world discover the reality of an evil, unilateral, imperialistic so-called hyperpower who no longer spends beyond it’s means. I will glady accept 9% unemployment in the US if it exposes the leftist EU politicians to the wrath of thier coddled workers who no longer have “asshole” American customers.

In a worldwide economic meltdown, the first and fastest to recover will be the US, followed by similarly structured free-market ecomonies. Followed many many painfull years (yeepee!) later by Europe, China and then decades later by the entire Middle East.

Let’s see how the worldviews of the French shift when there’s no wine for thier children.

I agree that the 90% rule tempts people to do things they shouldn’t. Usually, you could think of some economic reason to the rule, but I can’t see why anyone would try to double their investment, half with leverage. But then, I don’t work on Wall Street and have a home in the Hamptons, so what do I know.

What is the reason for the 90% cap? Do you know why it isn’t lower? It seems to promote financial mischief almost by design.

Check it out

http://www.washingtonmonthly.com/

Excellent. See also my brother’s comment above. He’s in the business of managing funds so he knows of what he speaks.

ed.

So what do we do with such a simple idea? We take those packages, slice and dice them into unrecognizable pieces, and sell them (collecting a fee in the process). No one really understands what they own, or what effect a slowing economy or rising interst rates (which started last summer) will have on asset values. And we’ve seen this movie before–the credit crisis of 1994 came about for almost exactly the same reasons.

We probably could have survived if this was all that was happening (as we did in 1994 without any huge government intervention as I recall). But the really neat part about these sliced and diced packages is that they were given a AAA rating by the rating agencies (side note: why is Congress spending time and effort trying to decide if Roger Clemens took steroids when we should be asking why the rating agencies were asleep at the wheel?) That AAA rating enabled owners to borrow up to 90% of the value of the investments and–guess what?–buy more! The problem comes when, after borrowing that money, if the assets go down in value, the banks require you put up more collateral. Which is what’s been happening since last summer. The Carlyle Group took $1 billion and turned it into $22 billion, which has now all disappeared. Again, we’ve seen this movie before–it ran in the 1998 credit crisis with Long Term Capital Management almost dragging down the financial system.

So the moral of this story is not the investment itself. It probably is not even the financial engineering some bright whiz kid came up with to create some of these toxic investments. The real killer is leverage (borrowing against the asset to buy more of it). Leverage creates outsize returns if it works, but wreaks havoc if it doesn’t. The solution? Restrict the amount of money that can be borrowed against assets. Instead of borrowing 90% against assets like this, restrict it to 50% or 60%. The Fed has the power/authority to do this. It may not help totally avoid the problem, but it should reduce the impact.

That’s the best explanation of how these securities came into being that I’ve read to date. Thanks, brother.

ed.

I wanted to add the greedy lenders and greedy brokers and greedy buyers, fed by the help of the US Gov’t and FED policies led to this unsavory situation.

The reckless buyers are now being bailed out at the expense of prudent buyers and they are also bailing out Wall Street.

Hollywood couldn’t write this stuff.