Wall Street and Subprime

Wall Street's largest banks, brokers, hedge funds, 'Big Boys' are reeling from the worst housing disaster since the depths of the Great Depression! As U.S. real estate values nationwide continue to plunge, the first few dominos in a complex web of financial derivatives have already fallen - and this may be just the beginning.

During the recent boom-time in American housing markets, the titans of Wall Street lined up to feed at the money trough. Firms like Bear Stearns, Citigroup Inc., Morgan Stanley, Merrill Lynch, Lehman Brothers Holdings and JP Morgan Chase jumped at the chance to underwrite and re-package mortgage-backed securities - an estimated $6 trillion worth!

But the plunging property markets in the U.S. have brought the chickens home to roost - and the odor is very foul indeed. U.S. home prices and the $6 trillion mortgage-backed securities market are locked in a downward death-spiral racing to the bottom, which is marked by growing foreclosures, defaults and bankruptcies.

The share of sub-prime loans entering foreclosure in the first quarter of 2007 was the highest in almost five years, and sub-prime late payments rose to nearly 14% - indicating many more foreclosures ahead. The result is massive write-offs of collateralized mortgage obligations and other debt-derivatives that are exploding like hand-grenades amid the sub-prime panic. For instance, Countrywide Financial Corp., the largest U.S. mortgage lender, admitted to $110 million of foreclosed real estate on its books at the end of March - up more than 300% in just three months.

All of this foreclosed property must then be dumped on an already oversupplied real estate market, depressing prices even further. The result is likely to be a domino effect of even more catastrophic losses in mortgage-backed derivatives held by Wall Street's firms and the hedge funds they finance.

Already, two hedge funds at Bear Stearns were on the brink of being liquidated thanks to crushing losses in a $20 billion portfolio of complex and risky mortgage-backed securities and derivatives - much of it the toxic sub-prime variety. But Bear Stearns isn't the first victim, and won't be the last by any means.

In fact since 2000, Wall Street has created more than $1.8 trillion of securities and complex derivatives backed by sub-prime mortgages. Many of these are illiquid securities, so Bear Stearns' problems may be only the tip of the iceberg!