Kass: Ben Stein Whistles Past Mortgage Mess
08/15/07 - 12:29 PM EDT
Doug Kass
The subprime market is not an isolated problem as suggested by Stein; it is only the beginning of the chain.
The global credit bubble of leveraged financial engineering (and ownership of risky assets) has been pierced. Wall Street sold arcane and illiquid products with promises of limited risk and fat profits. I have fully covered the causality and chain reaction of deteriorating subprime on the broader world credit markets on The Edge. Throughout my chronicles, bulls scoffed. It is now clear, however, that our financial and investment world is so tightly wound and levered that the likely fallout is going to be far broader than almost anyone, except an outspoken minority, expects. What had been a liquidity problem is now morphing into a solvency problem in a wide and surprising array of assets and companies, including money market funds, Canadian trusts, cash management funds, mortgage companies, investment bankers, etc. The price discovery in the credit markets will inevitably result in further wealth destruction, bankruptcies and an ever-increasing risk-aversion, regardless of central-bank behavior. The excessive use of cheap, mispriced credit is the source of the problem, and providing more liquidity (as central bankers do) can hardly be considered a healthy solution. Our financial system is like an alcoholic who has had too much to drink -- the solution is not to serve up another round of drinks but rather to close the bar.
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