Fools Rush In: Too Smart for Their Own Good

News today that BNP Paribas has suspended three hedge funds reminds me of one of the first shots across the bow on this mortgage mess early on when HSBC conceded it was too smart for its own good when it came to subprime loans.

Its systems, it conceded, simply weren't as good as it thought when it came to avoiding mortgage losses. As it turns out, and not surprisingly, HSBC wasn't alone.

The livin' had become so easy for everybody that nobody respected the risk. Everybody thought they were smarter than everybody else, and their secret weapons were so esoteric that even "they" didn't fully understand them.

But it didn't matter because the concept was so easy: Package together a bunch of loans of varying risks, they believed, and nobody would be hurt. Nobody, that is, but the suckers who took out the loans in the first place so they could buy they houses, cars, dresses, vacations and lifestyles they couldn't really afford. The suckers, of course, didn't think they were suckers because following a rigorous loan approval process they could get the cash. And with their high FICO scores (that's right, subprime was only part of this story) they were led to believe they were good for their money.

What could possibly go wrong? When they ran out of that cash, armed with their high FICO scores, there was surely plenty more where that came from because money, it appeared, really did grow on trees that went to the sky.

Just ask every Tom, Dick and Harry. Armed with the cheapest of cheap interest-only loans, they had become paper multi-kajillionaires, trading homes the way some people trade stocks. Everybody was laughing all the way to the bank, including the suckers.

Happy days were here again, and Wall Street's wizards had figured out yet another fail-proof magic potion that would let this party last forever.

Unfortunately for them and everybody else: While it was supposed to be fail proof, the magic potion wasn't fool proof. And as it turns out, from Wall Street to Main Street, the fools there were aplenty.

Comments

[wixeywaxy:]

I think the speculative hedge funds managers were something like the embezzler who keeps getting in deeper and deeper in a desperate hope that the failed investments made will miraculously bail him out. Of course we never hear about the lucky thief who finds salvation, but they haven't been so lucky. Now they have a scape goat. They can blame their asset devaluation on the sub prime market. The fault will be placed on this issue for a lot of failed investments of which the only connection to the mortgage market was that it was the last straw. The Tech bubble provided a similar kind of cover for many worthless ventures but the media never cast any light on the broader aspects of it either. Vic

2007 Aug 10 01:08 PM

[wixeywaxy:]

I think the speculative hedge funds managers were something like the embezzler who keeps getting in deeper and deeper in a desperate hope that the failed investments made will miraculously bail him out. Of course we never hear about the lucky thief who finds salvation, but they haven't been so lucky. Now they have a scape goat. They can blame their asset devaluation on the sub prime market. The fault will be placed on this issue for a lot of failed investments of which the only connection to the mortgage market was that it was the last straw. The Tech bubble provided a similar kind of cover for many worthless ventures but the media never cast any light on the broader aspects of it either. Vic

2007 Aug 10 01:08 PM

[elwind45:]

YUP.... so very true. DEBT DEBT DEBT!!!

2007 Aug 11 04:59 AM

[the final h...:]

i agree. proper retribution is found in the real old west. unfortunately it is not proper to discuss in this forum.

2007 Aug 10 09:21 PM

[elwind45:]

SO.... how about lowering rates. The fed has got to learn that " lower rates will continue the party ". The party is not the problem, the guests are the problem. The fed is in the box. Massive foreclosures will create a bigger future problem(de-flation). The fed has followed the idea that "a little inflation is not a all bad thing. Stag-flation has been around for longer than fed would admit.(to themselves) The real problem is the continuing tight money policy. We are heading for massive devaluation of assets. The fed has got to chance more inflation to save main street. The fed only cares about themselves and their members. (banks) The act of lowering rates sunday will " allow the short term injection of recent liquidity to become permanent. Lower rates will save recent homebuyers, and allow there assets to bubble up. The AMERICAN taxpayer WILL be on the hook. (like always) IT is much more important at this time to grow the economy inflation be damn (for the moment). Its a pity that the real crooks will walk, but the economy is more important than to punish everybody. A bailout to stop the credit crunch. OUR POOR OFFSPRING will be dealt a real BULLSHIAT future because of this CRAP!!!! (NO LESS)

2007 Aug 11 04:55 AM