Credit Risk-y Business

Its been a crazy two weeks in the financial markets, let’s recap:

– SocGen announces a USD 7.1 billion fraud in plain vanilla Euro indexes
– Euro markets fall on Jan 21-22, maybe due to SocGen unwinding those positions
– The Fed reacts to the falling European markets with an emergency 75bps rate cut before the markets open on Tuesday (Monday was a holiday b/c of MLK)
– 450,000 homes foreclosed in 2007 (as a reference in 2006, the top 10 homes builders built a combined 250,000 homes)
– 60 Minutes has a segment titled “House of Cards” – describing the subprime mess as one big ponzi scheme
– UBS announced a USD 14 billion subprime write-down
– Another Fed rate cut, this one is 50bps (a total of 125bps in 10 days)
– The monoline insurer MBIA announced a USD 3.5 billion subprime write-down
– US GDP growth was 2.2% for 2007
– Jobless claims surge 69,000, biggest jump since Katrina

Damn…and I’m sure I’m missing some stuff.

Yes, one of the biggest asset bubbles has sadly come to an end. Who is to blame for the bubble? I wish it was easy to pinpoint, but really everyone involved had some blame – homeowners, mortgage brokers, mortgage lenders, investment banks, rating agencies and the investors buying the mortgage backed securities.

However, most of the blame falls on the doorstep of the homeowners. I can partly sympathize with them because between 2004-2006 the only talk in town was about getting a house – THE American Dream. During the summer of 2005 it reached fever pitch and almost unbearable – “renting is stupid, house prices will always go up, tax deductions for homeowners”, etc…

But in the end no one forced homeowners to sign on the dotted line except for fear of missing out on THE American Dream – which like everything else in America is built on credit.