Wall Street's wild weekend

If you've never tried hanging by your ankles from a chandelier during an earthquake, turn on the financial news today and experience the fun for yourself.

It appears that Lehman Brothers and Merrill Lynch are about to go extinct after Sunday's day-long meeting of government and financial titans at the New York Federal Reserve failed to get them the protection of the Endangered Species Act.

Tens of thousands of people are going to lose their jobs, and maybe their houses, which won't do anything to help the sliding real estate market that appears to have triggered all the trouble to begin with.

And it was such a nice habitat, too.

America Wants To Know has been struggling to understand how the real estate market, which historically has always had its ups and downs, could be chewing up and dragging to their deaths investment banking firms that pre-date the Great Depression.

As near as we can tell, the problem stems from a lack of information.

Mortgage debt has been put together and sliced apart and sold as if it were a corporate bond. Then the buyers and sellers of the bond-like instrument bought and sold something called a credit default swap, or CDS, which amounts to a kind of insurance against default or similar loss in value.

Now, because no one seems to know which mortgages are spliced into which financial instruments, and everybody is on the hook for payments to everybody else in cases of default, the interconnectedness of all things has Wall Street spinning like an unhinged carnival ride. On Sunday the situation was dire enough to draw the Treasury Secretary and the New York Federal Reserve president away from the NFL games to bang heads, or more likely plead on their knees, to get the top executives of the biggest banks in the United States to take action to prevent a market meltdown.

The thing is, this all appears to be based on uncertainty, not hard numbers.

It seems that no one actually knows which mortgages are underwater, or how many of them are underwater, or how far underwater they are.

How many people do you know personally who are in default on their mortgage, unable to make their payments and unable to sell their house for what they owe on it?

A lot?

A few?

Almost everybody you know? Or hardly anybody you know?

America Wants To Know suspects that Wall Street was too enthusiastic on the way up and now is too hysterical on the way down.

We're buying. Carefully, of course. We follow the advice of the Granville Guys and dollar-cost average into no-load mutual funds. We don't buy individual stocks from Wall Street brokers. Those people are crazy. You could lose your house taking their advice.


Copyright 2008

Editor's note: You might be interested in the earlier post, "Bush to Little Red Hen: 'Pay up.'"

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