Real Wealth Society

Wednesday, October 10, 2007

Thinking about risks By Fred Cederholm

Column for on/after October 7th, 2007

I’ve been thinking about risks. Actually I’ve been thinking about ratings, the sub-prime loan Collateralized Debt Obligations (CDOs), the GSE’s of Fannie/Freddie/Ginnie, the 1933 Securities Act, “Red Herrings,” and Caveat Emptor. Last week saw more banks, investment banks, and investment funds effectively write-off their investments in the CDO derivatives. To say the “marking (down) to market (value)” was a write-down would be a gross misstatement as the current charges against income effectively took balance sheet valuations of these to near zero. Last week’s hits alone were in the TENS of BILLION of dollars; these were worldwide, and there will many, yes, many more yet to come.



You see although I was one of the very first anywhere to question “Is the Housing Market Going to Crash? - TH*NK*NG (HOUSING) in 2005 http://baltimorechronicle.com/033105Cederholm.shtml , even I never foresaw the total bloodbath that is now unfolding. I was left thoroughly confused by such a meteoric drop in the values of the CDO’s from near par (initial offering values) to near zero in one full swoop. I had been carrying my understanding of the workings of the more traditional Mortgage Backed Securities (MBS’s) issued by the Government Sponsored Enterprises (GSE’s) of Fannie Mae, Ginnie Mae, and Freddie Mac and the mandated risk and financial disclosures of the 1933 Securities Act to these new classes of debt based investment vehicles. TH*NK*NG I knew/ understood more than I actually did was a critical flaw in my logic. There is a moral in this for me and for all of us. For those who bought into these, a lack of real understanding of what was what will prove exceedingly costly.



The sub-prime and alternative-A loans that gave rise to theses new bodies of derived investment vehicles in no way met the standards of the loans that were pooled and sold to Fannie, Ginnie, and Freddie. The borrowers lacked the necessary credit worthiness, there were little (if any) down payments required, and the loan-to-value approached (or exceeded) 100% of the properties – there was no cushion available to the lenders in the event of a downturn. Even at advancing more money than the properties were worth, everything was honky dori as long as payments were being made timely, interest rates stayed low, the required mortgage payments didn’t increase, the properties continued to appreciate in value, and the investors (in the CDO’s) were content to let things ride and not try to cash out. Well guess what? ALL of those pre-requisites went away. Poof, the houses of “cards” began to tumble and collapse!


I should have caught the distinction in the shift of wording from “Mortgage Backed Securities” to “Collateralized Debt Obligations” because there is a huge terminological difference in “the terms of art” – phrases/words having a unique and defined meaning in a specific context. I must warn my readers I’m speculating on what happened; but at least in the following context, it begins to make sense to me.



In a Mortgage Backed Securities scenario one could ultimately identify the property’s mortgages making up the investment pools. Even in arrears, default, or foreclosure; this is true. They could be identified; thus some value could be attributed to investor units. If, in the case of the Collateralized Debt Obligations scenario; the “investments” entitled the investor(s) to future cash flows from “X” amount of $’s of debt as a fungible commodity like bushels of corn, pounds of pork bellies, or shares of a particular class of common (or preferred) stock that was NOT true - because all properties are not equal. The late Arthur Rubloff stated: “in real estate; the three most important things are location, location, location.”



Were these critical distinctions (and risks) disclosed to the investors on the front page of the offering circular/ prospectus in red ink (hence the term “red herring”) - as required of all initial public offerings under the 1933 Securities Act? Did the 1933 Act even apply to all these derivative offerings? Did the investors really know what they were buying? How many pearls and how much lipstick were used in the marketing of these “pigs” to the investors? Answers to such questions will eventually come from the litigation flood which I guarantee will follow. Will “deep pockets” or Caveat Emptor – let the buyer beware – rule? I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.



Copyright 2007 Questions, Inc. All rights reserved.

2 Comments:

  • Hi !.
    might , probably very interested to know how one can reach 2000 per day of income .
    There is no initial capital needed You may start to get income with as small sum of money as 20-100 dollars.

    AimTrust is what you need
    The firm incorporates an offshore structure with advanced asset management technologies in production and delivery of pipes for oil and gas.

    Its head office is in Panama with affiliates around the world.
    Do you want to become a happy investor?
    That`s your choice That`s what you desire!

    I feel good, I began to take up income with the help of this company,
    and I invite you to do the same. It`s all about how to choose a correct partner utilizes your savings in a right way - that`s the AimTrust!.
    I make 2G daily, and my first investment was 500 dollars only!
    It`s easy to get involved , just click this link http://azozutykev.lookseekpages.com/yvukoni.html
    and go! Let`s take this option together to feel the smell of real money

    By Anonymous Anonymous, At 3:31 AM  

  • Good day, sun shines!
    There have were times of hardship when I felt unhappy missing knowledge about opportunities of getting high yields on investments. I was a dump and downright stupid person.
    I have never thought that there weren't any need in large initial investment.
    Now, I'm happy and lucky , I started to get real income.
    It's all about how to select a correct partner who uses your money in a right way - that is incorporate it in real deals, parts and divides the profit with me.

    You can get interested, if there are such firms? I'm obliged to answer the truth, YES, there are. Please be informed of one of them:
    http://theinvestblog.com [url=http://theinvestblog.com]Online Investment Blog[/url]

    By Anonymous Anonymous, At 11:10 PM  

Post a Comment

Subscribe to Post Comments [Atom]



<< Home