It’s amazing what a few beers and a trip to New York City can get you these days. In a recent conversation with an unnamed employee of an unnamed big NYC firm that is huge in the mortgage backed securities game I got a feel of just how bad it is on Wall Street. This person worked on the front lines - packaging and selling CDOs (collateralized debt obligations) to big-time investors. How big you ask? How about China, Austria, and a ton of other countries as regular customers?
His take seems to me to be right on. When asked if the housing market is going to “come back” he frankly said, “never.” The reason? “Do you think China’s gonna forget [how screwed they got]?” As he tells the story he could get anything he wanted rated AAA by the agencies with just a bit of alchemy and some statistics. Take a pile of subprime mortgage debt and slice and dice and voila - an AAA rated CDO. His firm would turn around and sell millions and billions of dollars worth of AAA-rated CDOs that turned in to 10 cents on the dollar, almost overnight. China, a huge buyer of our mortgage debt is holding paper that is worth no more than 10 cents on the dollar; and they hold a ton of it.
If you think lead-tainted toys are a big deal, how about being conned in to a bunch of bad subprime mortgage debt reformulated to look innocuous by the wizards (nay, snake oil salesmen) of Wall Street? The housing market will never return because China will never forget how screwed they got in this whole deal. Do you really think in 3 to 5 years China is going to take another blind plunge in to mortgage debt? Do you think other countries are going to come rushing back saying give us more crap? Not a chance.
Consumer sentiment doesn’t matter, lower rates don’t matter, these countries got burned by the billions and they won’t forget any time soon. The fuel for the American housing market run-up is not coming back. The question is now - how closed off is America and Wall Street to funding from these countries? Will they believe the ratings agencies and Wall Street houses when they tout their latest offering as AAA rated? What else will suffer as these countries keep their money on the sidelines, out of markets that have proved lucrative for US firms hawking their wares?
He said at least you mortgage guys can keep writing refis, but the CDO market is dried up. People [investor customers of the Wall Street firms] are really, really unhappy. And one last thought? You ain’t seen nothing yet.
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[Source: Blown Mortgage]
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