Thursday, February 14, 2008


Ever heard of Alt-A loans? Better get familiar, because they're next. Alt-A loans, like as in alternative to A, like as in alternative to good credit or full documentation of income, is a loan written with substandard credit or ability to pay. Not as risky as a total ARM, these loans were typically written for sub-680 credit holders and people with suspect ability to pay. Banks such as Countrywide wrote a ton of these loans and have been hesitant until now to even acknowledge the tremendous backlog on their books because guess what, they're going to take huge losses on the defaults of these as well. UBS came out today and said they had a $26 billion exposure to these things. Do you think they're the only ones?

Jim Jubak of MSN Money also foreshadowed of another set of loans waiting to collapse. As the government slashes rates to "stimulate the economy" with more credit for millions of already credit delinquent Americans, rates on student loans and some auto loans go down. That makes the bonds they're repackaged into less valuable. With rates set to go down further, those bonds will continue to lose appeal, so they may get sold sooner than later at less than they were purchased for, again causing writedowns for the holder.

I'm rooting for MBIA to get scorched on Capital Hill today. They wil testify that short-sellers, Bill Ackman in particular, have "unfairly driven their price down." Well, let's see. You guys left your primary business to back high-risk loans and you got blown up. Now, with your stock price in the pooper and your ratings about to get cut, you want government intervention. Why should anyone help you out? If your loans fail, it will force massive writedowns and reinsurance, but evryone who played the game knew that. Ackman warned about it in a 2002 report, but nobody wanted to listen.

Check back tomorrow for Bernanke's babble.....

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