The Trillion Dollar Meltdown - Part 3

In my previous 2 blogs I noted that author Charles R. Morris is the first writer out of the starting gate to tackle the issue of the "debt meltdown" in a head-on manner.

Here now is what Mr. Morris has to say about the current situation we face…

...the late 1990's saw the emergence of the "quants" on Wall Street – people with advanced degrees from Ivy League schools who practiced a very different brand of calculus, who could carve up old fashioned asset classes into new exciting creations.

...when these new creations were combined with the newly created Fannie Mae and Freddie Mac organizations the "pass through" mortgage was created. The concept of Collateralized Mortgage Obligations (CMO's) and Collateralized Debt Obligations (CDO's) soon followed.

...investors snapped these up for as far as they were concerned, the mathematicians had banished risk.

...the housing market rode the coat tails of the booming mortgage market and America experienced a housing boom from 2000 to 2005 like never before seen. Homeowners extracted something in excess of $250 billion from the "equity" in their homes and spent it.

...as mortgage lenders started to run out of people to provide mortgages to, they cast their nets wider and lowered their standards. The sub-prime mortgage was born.

... but it was more than just home owners who were at play. Corporations were busy selling asset backed securities (ABS) to finance new equipment purchases.

...the "quants" were not sitting still either. A new family of credit derivatives was born called credit default swaps. By the end of 2007, the notional amount of these swaps in play were $45 trillion.

...in the Fall of 2007 as credit markets started to sieze up, it became apparent that the banking sector was in crisis. Writeoff after writeoff ensued and the markets shuddered.

...the shifts that will occur in the US economy going forward will be wrenching. America has now had a taste of the Sovereign Wealth Funds stepping in to rescue ailing banks and hedge funds. What if this aid is not always so ready and willing in the near future?

...Mr. Morris then goes in to provide his estimation of what may lay ahead. When he sums up the sub prime debt, collateralized debt, the credit card debt and the asset backed and commercial property backed debt he figures the total write-downs will eventually add to $1 trillion – hence the title of his book. But he places a very big question mark behind the credit default swap debt and the monoline insurers. Should these all start to unwind, the total number could be much bigger than a mere $1 trillion.

This book is a must buy for everyone. Go to your favorite book store and get a copy today. If they do not carry it, they can order it. The publisher is PublicAffairs, a division of Perseus Books. The ISBN # is 978-1-58648-563-4