Tuesday, August 14, 2007

Wall Street sausage flattens the world

Some of my friends that are not conversant with financial world, have often poked me for cluing them in on this subprime situation. They all know it’s got to do with home loans turning bad in the US and wonder how the hell it matters to them living here in India. I had explained how financial markets operate, what happens after loans are made, the process of securitization of loans and marketing of high yield junk bonds that put liquidity back into the system. Few of them got the message, many just nodded. It bodes well to liken it to a sausage making business as this Bloomberg article suggests and would leave me with less and less to explain. Excerpts -

“In the case of subprime loans, which were packaged into mortgage bonds and sliced and diced into collateralized mortgage obligations, there was just enough real meat for the securities to be certified as kosher (AAA) by the rating companies. Eventually the knockwurst and bratwurst started to make people sick. Upon testing, the sausage was found to contain too little meat and too much by-product. It wasn't kosher after all. [In fact], the entire sausage production and distribution chain -- from homebuyers to mortgage lenders, from mortgage brokers to securitizers -- was found to be operating under unsanitary conditions and pretty much shut down until further notice.

And it wasn't just the wurst that was declared unfit for human consumption. Anything suspected of containing meat by- products was shunned by investors in favor of food with a federal government guarantee.”

That sums it up nicely, I guess…



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