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Shaky Markets Prompt Rumors of Who’s in Trouble

Interesting article.

Last year, Wall Street firms issued $773 billion in mortgage-related securities, up from $217 billion in 2001, according to the Securities Industry and Financial Markets Association.

Worldwide total "injections" recently have been a minimum of $325 billion. That is quite a large ratio of injection to amount of mortgage CDOs issued last year.

Unlike investors who hold large stakes in publicly traded American stocks, and must report those holdings to the Securities and Exchange Commission, no central government agency or private organization tracks who may be holding subprime or other mortgage-related securities in any detail. (The United States Treasury does track broad foreign country holdings of American mortgage securities.)

So, nobody really knows the extent of the possible damage the fallout can have. That certainly does not give one a good feeling.

Unlike stocks that trade openly on exchanges and whose value can easily be determined at any point of the day, mortgage-related securities and C.D.O.’s change hands behind the scenes via individual bids and offers made on trading desks across Wall Street.

And while, typically, billions of dollars of securities can move in and out of these markets with great ease, in recent weeks trading in mortgage-related has seized up because Wall Street firms are reluctant to buy or sell them, many traders and portfolio managers said.

Since no public information is available, we can really only tell what is going on by the actions from the insiders. And the actions they are taking all seem to be quite extreme in my opinion. Massive injections by the central banks, banks stopping withdrawels from certain accounts, Cramer screaming Armageddon.

If there is an upside to the mortgage meltdown, some analysts said, it may be that because these securities are held by so many investors the pain will be spread among many market participants instead of taking down a large single financial institution.

That is an upside? If only one or two financial institutions fail, they could at least be bailed out. If many are hit instead, it would depend on how financially strong they are to take the hit.

“The bad news,” he said, “is because of the difficulties in valuing these mortgage pools and the high levels of uncertainty and panic that have set into these markets, we have a situation where there is a severe lack of liquidity in the mortgage market and that has created an extremely dangerous situation for our economy and the global economy.”

What I read in "difficulties in valuing" is "nobody wants to buy them" (except for central banks). And if you can't sell something, it becomes worthless.

Wikipedia links:
Subprime meltdown

Posted: 2007-08-15 12:10:00

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