¡°The Golden Goose Magic Securitization Machine¡

I'll spare you having to once again having to read my long, torturedhistory lecture on the horrors of fiat currency, fractional reservelending, central banking, securitization and derivatives system, whichunderpins all of our troubles. Rather, I will focus solely on the lastfour years, fast-forward to today.

Back in mid-2003, FreddieMac was busted for “cooking the books” and monkeying around with thebalance sheet and P&L to actually—believe it or not— HIDE profitsto smooth out earnings so that their stockholders wouldn't think thatthis company was too volatile. So, Freddie had to curtail MBS purchaseswhile they accommodated every regulator and congressperson and hisbrother sniffing around their financials.

A year later, Fanniemet a similar fate. However, Fannie was accused of pumping up earningsin order to pay management outrageous bonuses. So, Fannie had tocurtail MBS purchases while they blah, blah blah…

Now, into thatvacuum left by Fannie and Freddie stepped the private-labelsecuritizers. These guys, however, were even MORE lax with theirunderwriting standards than even Fannie and Freddie and during thatperiod between 2003-2006, created roughly $2 trillion of very suspect MBS, which were sold to bahgolders.

Now,keep in mind that Fannie and Freddie didn't actually stop issuing MBS.They just cut back. And Fannie and Freddie's MBS aren't exactlypristine either, as their automated underwriting and “drive-by”appraisals were suspect. However, their federally-mandate caps onmortgages and mostly 80/20 requirements certainly spared them from evenmore carnage. Currently, Fannie and Freddie hold and/or guarantee about $3 trillion in their MBS.

Also during this time frame the home-equity/ATM securitizers were busy too and they created $600 billion in HELOC-backed MBS.

Ofcourse, the banking system didn't want to be left out of the party, soin addition to snapping up $1 trillion of the MBS that Fannie/Freddieand the private label boys created, they also loaned, directly tohomedebtors, an additional $3.4 trillion.

Finally, the WallStreet Quants created approximately $600 billion of CDO-sausages, whichincluded MBS as part of their “mystery meat”, and of course CLOs, CMBS,and other grissle, fat and bone.

Now, let's total all this up and see what we have:


Private Label MBS: $2 trillion

Fannie/Freddie: $3 trillion

HELOC: $600 billion

Banks Direct: $3.4 trillion

CDOs: $600 billion

Total: $9.6 trillion


Settingaside the $3.4 trillion in death pledges that the banks are directlysitting on, that leaves about $6 trillion in securitized debt.

Which was stuffed into every:

-Pension fund
-Mutual fund
-Money market fund
-Foreign Central Bank
-God only knows who else


So far, so good.

Ofcourse, a great deal of these MBS are backed by loans to VERY suspectborrowers—even some of Fannie and Freddie's. However, theconstantly-rising home prices allowed the homedebtors to serially re-fitheir way out of trouble, some doing so twice per year.

Then, the music stopped.

Itall started about a year or so ago, as the homedebtors started hittingthe wall and defaulting on their death pledges. This began the downwardspiral in house prices.

Then, early this year, somebody noticedthat the homedebtors were falling behind on their payments, which meansthe MBS weren't cash flowing, which means the MBS weren't worth whatthey were supposed to be worth, which means neither were the CDOs worthwhat THEY were supposed to be, which means that the CDS insurancewriters were gonna get creamed. (and the private mortgage insurerstoo).
So, the savvy players started demanding more compensation tobuy the MBS, which drove down the i-Traxx BBB-rated indices becausethese were the first to suffer from the defaulting homedebtingsheeple's lack of payments.

Then, all hell broke loose as theI-Traxx indices continued to fall and Bear Stearns—the largest,most-experienced--securitizer in the world had a couple of their hedgefunds blow up. A crucial signal that the MBS/CDOs weren't worth whatwas purported came when Merrill and others tried to sell them off in amargin call and were told, politely, by the open market: “No thanks. Wedon't want them at ANY price, much less than at what you are offeringthem.”

The cascade gained speed as more and more mortgageoriginators started to fold--the pipeline of funding to them rapidlydrying up as nervous mezzanine finance dudes grew increasingly nervousthat they could pass the trash to the next sucker and many of thebagholders of present MBS/CDOs started to balk at NOT ONLY buying moreof this trash, but also asking pointed questions as to the worth of thejunk they held.

Which leads us to the most-recent period. Asmore and more homedebtors are defaulting, and the MBS aren't cashflowing, the underlying “collateral” is proving to be not worth whatthe securitizers told the bagholders it was. The i-Traxx has collapsed(the BBB stuff and even the so-called “AAA” stuff is suffering). Whichbrings up the next point:

The ratings agencies.

Withoutgoing into a long-winded diatribe, suffice it to say the ratingsagencies “opinions” that much of this stuff was “AAA”, were, uh, wrong.Say what you want about conflicts of interest, incompetence, orwhatever. The bottom line is that many of the above-listed bagholdersshould have known that there is something wrong if you are buyingsupposed “AAA-rated” paper, but getting better-than AAA rates. Duh.

Now,many of these bagholders are gonna be in deep do-do because as therating drops from the already-bogus “AAA” to something more realistic(like “D” for default), they will have to divest, as their charters(and in many cases laws and regulations) required them to hold onlyreal “AAA” stuff—if there is any left.

Okay, back to the final part of this excruciatingly boring missive:

The endgame.

So, the world is stuffed with $6 trillion in highly-suspect MBS, CDOs, CDO-squareds, ad infinitum.

The cash ain't flowin',

The “value” of the MBS/CDOs are plummeting.

Margin calls are going out all over the place. Stuff is being dumped at fire-sale prices—if they can even GET a bid.

Investorsin the various tranches are trying to exit the burning building. Butthe hedgies and investment banks are locking the exits.

Into thefray this week steps the world's central banks. And like pyromaniacs incharge of the fire station, they offer more gasoline “liquidity” tofight the fires they themselves set with their fiat/fractional reservelending/central banking/securitization/derivatives matches. They have,literally, offered “Infinite Fiat.”

And, sadly for our ownbeloved Mannfm11, the U.S. is NOT, I repeat NOT being discriminate inwhat they are sopping up, as demonstrated by their lending against themost dredgy of private label MBS.

So, we have now blown a multi-trillion dollar (I'm still gonna stick with my $3 trillion prognostication) hole in the Good Ship Real Estate Titanic.

And, to mix metaphors, we have also killed “The Golden Goose Magic Securitization Machine”.

And the investment world is in a panic.

And they should be.