Just Say AAA: PAUL KRUGMAN - Housing Bubble; FRANK RICH - Wider Cheney Plot +

OP-ED COLUMNIST
Just Say AAA
By PAUL KRUGMAN
Published: July 2, 2007

What do you get when you cross a Mafia don with a bond salesman? A dealer in collateralized debt obligations (C.D.O.’s) — someone who makes you an offer you don’t understand.

Seriously, it’s starting to look as if C.D.O.’s were to this decade’s housing bubble what Enron-style accounting was to the stock bubble of the 1990s. Both made investors think they were getting a much better deal than they really were. And the new scandal raises two obvious questions: Why were the bond-rating agencies taken in (again), and where were the regulators?

To understand the fuss over C.D.O.’s, you first have to realize that in the later stages of the great 2000-2005 housing boom, banks were making a lot of dubious loans. In particular, there was an explosion of subprime lending — home loans offered to people who wouldn’t normally have been considered qualified borrowers.

For a while, the risks of subprime loans were masked by the housing bubble itself: as long as prices kept going up, troubled borrowers could raise more cash by borrowing against their rising home equity. But once the bubble burst — and the housing bust is turning out to be every bit as nasty as the pessimists predicted — many of these loans were bound to go bad.

Yet the banks making the loans weren’t stupid: they passed the buck to other people. Subprime mortgages and other risky loans were securitized — that is, banks issued bonds backed by home loans, in effect handing off the risk to the bond buyers.

In principle, securitization should reduce risk: even if a particular loan goes bad, the loss is spread among many investors, none of whom takes a major hit. But with the collapse of the $800 billion market in bonds backed by subprime mortgages — the price of a basket of these bonds has lost almost 40 percent of its value since January — it’s now clear that many investors who bought these securities didn’t realize what they were getting into.

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Posted by CRIMES AND CORRUPTION OF THE NEW WORLD ORDER NEWS mparent7777 Marc Parent CCNWON

Labels: banks, bonds, bubble, C.D.O., economy, financial markets, housing, mortgages, New York Times, News, PAUL KRUGMAN, Politics, stocks, Subprime loans



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