Friday, October 17, 2008

When the ducks quack, feed them

This Fortune magazine article spotlights just one example of the "Junk" mortgage instruments that have poisoned the market. It's a good simple explanation for us financial rubes who get suckered every day. Sample from article...

This issue, which is backed by ultra-risky second-mortgage loans, contains all the elements that facilitated the housing bubble and bust. It's got speculators searching for quick gains in hot housing markets; it's got loans that seem to have been made with little or no serious analysis by lenders; and finally, it's got Wall Street, which churned out mortgage "product" because buyers wanted it. As they say on the Street, "When the ducks quack, feed them."
Alas, almost everyone involved in this duck-feeding deal has had a foul
experience. Less than 18 months after the issue was floated, a sixth of the borrowers had already defaulted on their loans. Investors who paid face value for these securities - they were looking for slightly more interest than they'd get on equivalent bonds - have suffered heavy losses.

I like the "duck quack" thing. This also reminds me of the WC Fields quote: "There's a sucker born eveyday"
One last point it was Goldman Sachs that created this package. They were the first to get bailed out, by Warren Buffet! Ever wonder what Warren knows that we don't?
It was sold by Goldman Sachs (Charts, Fortune
) - GSAMP originally stood for Goldman Sachs Alternative Mortgage Products but now has become a name itself, like AT&T and 3M.

Read the whole thing

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