Friday, February 27, 2009

The Debts of the Spenders: The Problem W/Re-Financing Americans' Debt

If sub-prime homeowners can get bailed out then why not all homeowners? Or for that matter, student loan holders (such as yours truly who does not and has never owned a home but is deep in student loan debt)?

Apparently the answer really is simple.

It is a cash flow problem.

Allowing ALL homeowners and student loan holders to refinance at low rates (for example, below 5% on a 30 year note) would be equitable and eliminate the problem of moral hazard.

But doing so would hurt the banks, financials, and other institutions that hold Americans in perpetual debt slavery through their ownership of mortgages and asset backed securities.

Massive refinancing would lower their interest incomes and further increase the basis point spread in an already illiquid ABS market.

I can already hear the protests from some ABS and fixed income traders reading this site (those few that deign to visit anyway). "But it's all available on my Bloomberg and Reuters terminal! See, there IS a market."

Really. Now who are we kidding.

It's not as simple as punching in a bunch of CUSIP numbers and running a black box model around the theory.
( CUSIP stands for Committee on Uniform Securities Identification Procedures. CUSIP identifies most securities, including: stocks of all registered U.S. and Canadian companies, and U.S. government and municipal bonds. The number consists of 9 characters - including letters and numbers - that id a company or issuer and the type of security. For more information please visit

The ABS market is full of non-conforming, chopped up tranche loans, bits of derivatives, and other junk floating around. I don't pretend to understand the system. JP Morgan, Citicorp, and other big banks have entire operations dedicated to analyzing and researching the ABS market. And THEY don't even know what it means anymore.


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