Monday, March 19, 2007

Hedge Your Bets

Back to economics.

I think one of the biggest ways in which I’m emulating Greg Mankiw is by frequently linking to articles written by Sebastian Mallaby from the Washington Post.

In his latest Op-Ed, Mallaby shows how sub-prime lending market “bubble” is different the tech-stock bubble because the losers back then in with the tech stocks younger adventurers, whereas now…

There's no fodder for advertising laughs in the mortgage debacle. Many of the liar loans and exploding ARMs were extended to low-income families, who now can't meet their payments and face the prospect of eviction. According to the Center for Responsible Lending, one in 10 recent home buyers who are black will lose their properties, 2 1/2 times the likely rate for whites.

This is definitely a lot more serious in terms of what the consequences mean. We’re talking about people losing their homes.

However, I (nor Sebastian Mallaby for that matter) don’t mean to strike fear. And what’s why Mallaby writes that more government regulation isn’t the answer, and might make the problem a catastrophe. In my opinion, this shows that the lending banks here are at fault because they wanted to give those loans to those customers with those terms. Don’t be surprised if I can’t make the payment when my interest rate jumps after the second year. And not only that, but if you’re making that kind of loan, where’s your hedge? Even I took a class on risk management, hedging, derivatives and options securities. I know those wunderkids who took those same courses are in your firm somewhere toiling away playing solitaire. So, get them working on some new hedges, or rather, actual hedges.

I digress though because these firms probably do have hedges working, and that’s why they aren’t in the tank yet. However, their stock prices are suffering and I am trying to understand why the market thinks matters will continue in this manner for some time. I think we’ll find out soon enough when more lending firms give out earnings reports, and give statements regarding their financial and cash positions. Hopefully then, we’ll see that that they are still sound.
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