What we are witnessing in the Collateralized Debt Obligations market we believe, are the first real cracks in the Crack Up Boom. In the first half of 1995, total issuance of securities backed by subprime residential mortgages did not exceed US$25 billion. Ten years later, between January and July of 2005, the number was more than half a trillion. What this increase did is now visible to the human eye. Just look at Las Vegas or Central Florida… or around any major city in the United States. There are split foyers, Spanish colonials, neo-classical… you can get wood, you can get brick, you can get stucco – boy, can you get stucco.
Less obvious to the human eye is the extraordinary effect of so much easy, innovative credit on the whole world economy. Borrowers could lie about their incomes; nobody cared to check because the lender had no intention of holding onto the loan until it was paid off. No… he was going to sell it on… and on… and on… until it came to rest in a hedge fund, such as Bear Stearns’ Enhanced Leverage Credit fund. But now, we are seeing – for the first time – what some of these CDO packages might really be worth. And the answer is – “not much”.
Markets and Money