Can someone explaine this Financial Times article please and

[keep_it_real]

Put it in layman's terms, thanks.

http://www.ft.com/cms/s/0/807c8a64-355a-11dd-998d-0000779fd2ac.html?nclick_check=1

[papau]

1. Pricing of derivative based investments ignored price drop mortgage default - now

there is still no good data on what to expect and how often to expect it in terms of default caused by falling home prices.

The result is that current assets can't be valued by model - and you are left with the price that the Wall Street vampires will pay - about 40 to 50 cents on the dollar.

Using that low bid as the value of your assets means the "surplus" you thought you had has now disappear in a capital gains loss (the difference between the bid and what you paid which was based on that faulty model that did not factor in a possible price decrease in homes and the effect that that would have).

Since dividends are paid from the surplus, they are now at risk. When new equity is sold the per share value of the organization goes down because the total value is spread over more shares. To protect the surplus that remains new risk taking is cut back making getting credit difficult to obtain which makes economic expansion difficult.

Hope that helps

[izquierdista]

2. It's mostly BS

The key phrase is "demand for risk". It indicates that the writer has stewed too long in an economist babble-tank and can no longer make sense. He wants to explain the mortgage meltdown in terms of supply and demand, balancing the supply of mortgages with the demand for higher yields (risk). In economist babble, there is supposed to be some balance between the two, which is what gets traded in the market. What he fails to do, like most economists, is to examine whether the axioms of a free market are present before he launches off into his analysis.

1) Is there a low barrier to entry to the market for buyers and sellers? Only if you believe that Bear Stearns and Joe Sixpack negotiated that mortgage as equals before Bear repackaged it into a mortgage backed security (MBS). If you think that Joe Sixpack was lulled in by deceptive advertising by Countrywide, scratch that axiom.

2) Is there perfect information in the marketplace? Only if you believe that the buyers of the MBS knew exactly what Joe and his fellow borrowers had on their applications. If you think that these things got flipped faster than pancakes at a parish breakfast, scratch that axiom.

I tried the FT once with a trial subscription. They take the dogmatic classical view of economics going all the way back to Smith and Ricardo. If they could go back and find some quatrains from Nostradamus about economics, I'm sure they would include that, too. I gave up on this mumbo-jumbo as little better at explaining the world than astrology or reading entrails.

[keep_it_real]

3. papau, izquierdista thanks for taking the time

It's appreciated.

[Warpy]

4. "has stewed too long in an economist babble-tank "

I'm going to have to steal that one.

Countrywide, especially, violated all the rules when it wrote mortgages. They didn't even inspect the properties to find out whether it was a house, a shack, or an empty lot. Remember, a guy who had been dead for five years was found in one of the houses they'd written loans on three times during that period.

Obviously, nobody at the hedge funds who were chopping those mortgages up into exotic securities had a clue the Countrywide people were pumping, dumping, and pumping again. The banks who bought the securities didn't know the hedge funds were just laundering a bunch of bad loans from a crooked company into pieces of paper with attractive names.

Now it's all going bust. That's the bottom line, and what the economists writing erudite articles for the delight and edification of fellow economists won't tell you.