HowardReal Estate bomb to Hedge Fund Hole
October 22nd 2006 18:43
Carnegie Hill, Real estate icon, east side
Alan Greenspan, although no longer the Federal Reserve Chairman, is still alive and around to comment on his wizardry as creator of the Housing bubble. This was intensified, after the NASDAQ and "petfood.com, etc." crashed in March 2000. In a mere 4 months the Nasdaq crashed by two-thirds. Greenspan's response was to lower interest rates 13 times in a row, to keep from a total financial colllapse, and to make the housing bubble real big.
Now the other issue that is coming to head, is what do all of those bad mortgages mean out there. You know, the exotic, interest only payment mortgages and minimal option payment. These mortgages are sold to Fannie Mae and Freddie Mac, etc, and are repackaged as MBS (Mortgage Backed Securities). But, now that the foreclosure rate is going up, somebody is going to be caught holding the bag, and it's not only going to be people in China someplace. (see Wall St. Journal Oct 9, Bad Loans Draw Bad Blood). H & R Block, who owns the subsidiary, Option One Mortgage Corp, already got hit in a $131 million loss in July, they had to buy back mortgages and absorbed the losses from defaults.
These MBS seem to have some sort of provision, that they can be returned or bought back, if they have too high a proportion of default loans. That is one hell of a trigger in a $20 trillion market.
A similar type of thing can hit the hedge funds sooner or later. Under the misguided pension reform bills of 2006, more and more pension funds are "encouraged" to dump their money in hedge funds. This explosion of hedge fund money can find various crashes, like what happened to Amaranth and Vega. The New York Times, Sun 10-22 has the latest on the hedge fund insider trader scandals, this one about Pequot Hedge Fund and Mr. Mack. Willl someone have legal grounds to demand this pension money back too?
So will the tony investors in Carnegie Hill make enough of of their Hedge Funds to pay their 20% profit margin, and pay their new $5 million mortgage?
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