Monday, March 17, 2008

When Will This End?

Everyone on Wall Street has an opinion. Opinions that range from the optimistic - market bottom is here to the pessimistic - doom & gloom is yet to unfold. Some common sense logic that makes sense comes from Alan Greenspan.

"It (current financial crisis) will end eventually when home prices stabilise and with them the value of equity in homes supporting troubled mortgage securities.

Home price stabilisation will restore much-needed clarity to the marketplace because losses will be realised rather than prospective. The major source of contagion will be removed. Financial institutions will then recapitalise or go out of business. Trust in the solvency of remaining counterparties will be gradually restored and issuance of loans and securities will slowly return to normal. Although inventories of vacant single-family homes – those belonging to builders and investors – have recently peaked, until liquidation of these inventories proceeds in earnest, the level at which home prices will stabilise remains problematic."
FT - We will never have a perfect model of risk

Once you move beyond exotic acronyms like CDO, SIV and CDSs - the real story is the unraveling of the housing bubble. Housing remains an issue with high housing inventory, dropping prices, tight credit, increasing foreclosures and financially strapped consumers. How long before housing stabilizes? Mr. Greenspan suggests it could be an indeterminate number of months in the future and the damage caused by this crisis could leave many casualties. We saw one venerable Wall Street firm disappear today, the next few months will definitely be anything but boring.

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