In case you missed it, there was big news in the subprime loan and hedge fund industries this past week. The short version of the story is that Bear Stearns had to lend one of its hedge funds $3.2 to keep it from collapsing. The longer story is that this is just the tip of the iceberg. There are now, apparently, over $1.8 trillion in what are called "collateralized debt obligations," incredibly complex securities built atop our decade long housing bubble. And the best part? No one, not even the gurus on Wall St, have any idea how to assign a value to the securities on which these securities are based. Which was fine, I suppose, when the housing market was trending up. But now that it has reversed course, well...
For those of you who prefer your analysis in pictures, take a look at this graph dug up by Hilzoy. We are now in month five, the beginning of a massive wave of adjustable rate mortgage resets. As you look over the graph, be sure to pay particularly attention to the enormous percentage of loans taken up by the sub-prime category. November and December look to be a particularly interesting months.
In brighter news, if we can just make it another 18 months or so without a major financial collapse, we'll be out of the woods. No worries, right?
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