How Missed Signs Contributed to a Mortgage Meltdown

[Cruzan]

All through last year, Jim Melcher saw the signs of a rapidly deteriorating American housing market — riskier mortgages, rising delinquencies and more homes falling into foreclosure. And with $100 million in assets at his hedge fund, Balestra Capital, he was in a position to do something about it.

So in October, as mortgage-backed bonds were still flying high, he bet $10 million that these bonds would plunge in value, using complex derivatives available to any institutional investor. As his gamble began to pay off in the first months of 2007, Mr. Melcher, a money manager based in New York, plowed the profits into ever bigger wagers that the mortgage crisis would worsen further, eventually risking some $60 million of the fund’s money.

“We saw the opportunity of a lifetime, and since then events have unfolded on schedule,” he said. Mr. Melcher’s flagship fund has since doubled in value, even as this summer’s market turmoil cost other investors billions, forced the closing of several major hedge funds and pushed the stock market down 7 percent since mid-July. This week, Mr. Melcher is heading to Paris for a vacation with his wife.

The extent of the turmoil has stunned much of Wall Street, but as Mr. Melcher’s case makes clear, there were ample warning signs that a financial time bomb in the form of subprime mortgages was ticking quietly for months, if not years.

More: http://www.nytimes.com/2007/08/19/business/19credit.html

 

[bighog]

http://www.neweconomics.org/gen/news_rweophantom.aspx

This is from 2003........GOOD reading, as we all know as traders, things are not that difficult to understand and foresee...........it is the timing that gets us, JUST like it gets the mkts. Cows and pigs come home sooner or later. Like the farmer might sat: "They will come home when they are through romping around.



Here is another nice read: Put down the comic book for 10 minutes.

http://www.jubileeresearch.org/media/bubble010903.htm

 

[piezoe]

Many of us saw this coming, not just Mr. Melcher. But as you say, it is the timing that confounds us.

What is truly startling is that any money manager, banker, or real estate professional could be so out of touch as to think that the Greenspan liquidity bubble would not implode at some point down the road, with major consequences.

What I did not see coming was the Fed rate cut, which coming in the timely manner it did, on expiration Friday, saved many a hedge fund whose dim-witted principals certainly did not deserve to be saved. Yet, I do understand that the Banking system can not be allowed to go under. What really annoys me, however, is the apparent insider trading that occurred.

 

[mde2004]

Congrats to Mr. Melcher if he is reading this thread tonight.

 

[stock_trad3r]

yaaawn