| As the US real estate market collapses, questions | | | | quickly across global highways recently built and made |
| about subprime mortgages and those unable to pay | | | | possible by a one world financial marketplace, and that |
| are in the news. These are not inconsequential | | | | risk is now about to become apparent. |
| questions. Over $1.5 trillion of subprime--don't ask, don't | | | | Global currency flows move swiftly and quickly and |
| tell--mortgages were issued and are now beginning to | | | | turn on a dime. The Asian liquidity crisis of 1997 was a |
| default. | | | | recent manifestation of this phenomena; the next crisis |
| As the defaults mount, the consequences will spread | | | | will be the US. The subprime losses suffered by the |
| to countries and institutions far beyond the shores of | | | | buying of America's bad debts may be the final straw |
| the US and the desks of the originating lenders--for the | | | | in the diversion of foreign moneys away from |
| majority of America's subprime loans are owned by | | | | America. |
| investors, banks, insurance companies, and pension | | | | By selling foreign investors its bad debt, America has |
| funds in Europe and in Asia. | | | | shot itself in the foot. Because America is now the |
| Why Would Anybody Do Such A Thing? | | | | world's #1 debtor, because America needs over $1 |
| It retrospect, it wasn't a good idea, to wit, to loan $1.5 | | | | trillion in foreign investment capital each year to pay its |
| trillion without asking applicants how much money they | | | | bills--and because it was foreign investors that were |
| had or how much money they made. It seems | | | | primarily burned by Wall Street's subprime CDOs, the |
| improbable that bankers (remember those thin-lipped | | | | flow of foreign capital to the US may soon be going |
| disapproving loan officers) would loan money under | | | | elsewhere. |
| those conditions. But they did and this is why: | | | | In April 2007, a Merrill Lynch survey showed 38% of |
| One year after the collapse of the US stock market in | | | | global money managers believed the best prospects |
| 2000, the NASDAQ dropped 80% and the US | | | | for corporate profits were now in the eurozone, 42% |
| government feared a deflationary depression--a no | | | | believed the worst prospects were in the US. |
| money no demand depression like the 1930s--could | | | | Today, the word "de-couple" is increasingly heard |
| happen. | | | | where global markets are discussed. No longer |
| So in 2001 the US government took quick and decisive | | | | referring to freight trains or dogs in delicto flagrante, |
| action--in retrospect stupid and short-sighted--and | | | | de-coupling refers to the distancing, i.e. de-coupling, of |
| flooded the US with money to prevent a depression | | | | global economies from the US, to wit, the increasingly |
| from developing; but, in the process they created a | | | | perceived expeditious act or art of separating |
| real estate bubble and, as the bubble deflates, those | | | | still-healthy economies from the slowing US economic |
| who can't pay their bills, aren't. | | | | engine. |
| Banks aren't in business to loan money to those who | | | | While it is true the US has been the driver of the global |
| can't repay them and they knew that customers who | | | | economy, it is no longer. The sobriquet "has been" is |
| "took advantage" of subprime mortgages were at high | | | | literally correct in this instance. The US share of global |
| risk of default. So the banks sold their subprime loans. | | | | economic growth so far in 2007 is 10%, a figure |
| Now, who would buy a "subprime", e.g. substandard, | | | | analogous to Barry Bonds batting .134. |
| loan? Who would buy a subprime steak, a subprime | | | | Global capital flows, like tsunamis, are not something to |
| car, a subprime house, a subprime dating service? This | | | | be taken lightly. If the flow of foreign money to the US |
| is where the genius of Wall Street came into play. | | | | slows, the US dollar will collapse and the US will be |
| To sell these soon-to-explode debt bombs, Wall Street | | | | forced to raise interest rates to continue attracting |
| cleverly bundled them with higher rated AAA debt and | | | | foreign capital. And, if US interest rates are raised, the |
| gave them a new name, CDOs, collateralized debt | | | | US economy will collapse. Greenspan might call this a |
| obligations, and sold trillions of dollars of 30% subprime | | | | conundrum. Other people might call it and Greenspan |
| but AAA rated CDOs to unsuspecting buyers. | | | | something else. |
| Even if you don't know what a CDO is, CDO sounds a | | | | Whose feet? |
| lot better than subprime or substandard. That was the | | | | Whose fire? |
| genius of Wall Street. It was a way for Wall Street to | | | | America apparently cares little what happens to the |
| sell shaky debt before the fenders fell off. And it | | | | primarily foreign investors and institutions who bought |
| worked, at least for Wall Street. | | | | its subprime loans. On April 24th, Bloomberg reported |
| These debt bombs are now embedded far across the | | | | the head of the US Federal Deposit Insurance |
| global financial landscape, the majority bought by | | | | Corporation, Sheila Blair, testified before a |
| European and Asian investors and institutions seeking | | | | congressional committee, ``We should hold the |
| downstream revenues; but instead of downstream | | | | servicers' and the investors' feet to the fire on this...We |
| revenues, they will be absorbing unexpected and | | | | did not have good market discipline with investors |
| significant losses. | | | | buying all these mortgages.'' |
| Fully 50% of the 2006 earning of HSBC, The Hong | | | | It is highly doubtful Ms. Blair will exhibit the same attitude |
| Kong Shanghai Banking Corporation, the world's third | | | | should the flow of foreign moneys upon which Mr. and |
| largest bank, were wiped out by the subprime losses | | | | Ms. Average America depend go elsewhere. |
| of its US subsidiary. AXA, a French insurance | | | | Thailand's economy went into apoplectic shock and its |
| company and CommerzBank, a German Financial | | | | currency and stock market fell by 50% in 1997 when |
| Services company were also major buyers of Wall | | | | international currency flows suddenly changed direction. |
| Street's subprime AAA rated debt and will suffer the | | | | America may soon be in for the same. |
| consequences for so doing. | | | | And if America falters and falls, the consequences of |
| But it was not only European and Asian banks, | | | | such will be felt around the world. Today, afternoon |
| insurance companies, and hedge funds and pension | | | | tea and scotch flow freely in The City as does dim |
| funds that will suffer, wealthy Japanese investors may | | | | sum in Hong Kong and Shanghai and sushi in Tokyo |
| suffer the greatest losses of all. It is believed that the | | | | around their respective bourses. Soon, however, the |
| highest-yielding but riskiest tranches (risk level) of the | | | | risks that have lain dormant beneath globalization's |
| subprime CDOs were bought by wealthy individual | | | | foundation are about to erupt and a reordering of the |
| Japanese investors. | | | | world's financial geography is about to ensue. |
| The head of structured finance research at Nomura | | | | It's spring 2007 and the sun is shining in the US, |
| Securities, Mark Adelson, said these investors did not | | | | backyard BBQs are being cleaned in anticipation of |
| fully understand the risk they were taking, depending | | | | summer's use. A severe financial crisis, however, is in |
| instead upon the ratings given by credit agencies such | | | | the offing; a crisis as unexpected as the Golden State |
| as Moody's or the advice of those managing the | | | | Warriors' last minute streak to the NBA playoffs. |
| security. | | | | An unexpected financial crisis, however, will be much |
| "A partial understanding of it is often no better than no | | | | more consequential than Don Nelson's magical |
| understanding," Adelson said. "The devil is in the details; | | | | resurrection of the Warriors' NBA hopes. There, at |
| if you understand it vaguely, you can get your lights | | | | least, the Warriors had a chance. But because most |
| punched out." | | | | don't know a financial crisis is coming, they will have |
| Globalization has been a wealth builder, perhaps | | | | little chance of survival. This summer, America's |
| unequally so, but nonetheless wealth has been created. | | | | subprime CDOs are coming home to roost, and not |
| Soon, however, another darker side of globalization is | | | | just to the US. |
| about to manifest. Risk as well as money move | | | | |