Sunday, August 19, 2007

In Mortgage Meltdown, Missed Signs

How can we trust the "Financial Experts" if they could not see this coming although some did and made a bundle
All through last year, Jim Melcher saw the signs of a rapidly deteriorating American housing market — riskier mortgages, rising delinquencies and more homes falling into foreclosure. And with $100 million in assets at his hedge fund, Balestra Capital, he was in a position to do something about it.

So in October, as mortgage-backed bonds were still flying high, he bet $10 million that these bonds would plunge in value, using complex derivatives available to any institutional investor. As his gamble began to pay off in the first months of 2007, Mr. Melcher, a money manager based in New York, plowed the profits into ever bigger wagers that the mortgage crisis would worsen further, eventually risking some $60 million of the fund’s money.

“We saw the opportunity of a lifetime, and since then events have unfolded on schedule,” he said. Mr. Melcher’s flagship fund has since doubled in value, even as this summer’s market turmoil cost other investors billions, forced the closing of several major hedge funds and pushed the stock market down 7 percent since mid-July. This week, Mr. Melcher is heading to Paris for a vacation with his wife.
As I have been saying for some time, the financial
markets have become like Las Vegas. The problem I have is how could they have not seen this coming? I am certainly not a financial expert but I would put my knowledge of the markets above a majority of Americans simply because of my employment in the financial service field for the past 15 years.

How could you think that a housing market could sustain ever increasing price growth without a similar growth in wages? How could you think that a population with a negative savings rate and ever increasing debt could keep up this dizzying upward spiral in home prices. I knew logically it could not be sustained as I believe so did most experts but they remained silent. Why would they remain silent? The real question is did they remain silent or were they told to shut up?

I am the President of my cooperative board where I live and it was my decision as to where to place the cooperatives reserve funds. I was offered the opportunity by our broker to invest in mortgage backed securities. I was told they were "A" rated and did not pose a risk to capital. I did not believe that to be the case knowing what I knew about the state of the current mortgage industry. I chose instead CD's at lower returns but with no risk to principal. My last call to the broker revealed that the bonds I was pitched were actually down although I was not told to what extent. If I could make the right decision, why couldn't the experts? Was it just dumb luck?

It seems ethics and logic go out the window when a quick buck can be made. The problem is that we will all suffer now as a result of this greed. Read the rest of the linked story. It is eye opening in many ways.


Larry said...

How could they not see all the signs, and now the headlines are very similar to those of 1929.

Jeff said...

Yes actually they are very similar to 1929 but I do think that protections have been put into place to stop that type of a depression from happening again although recession is likely to me.