Subprime? Just a detail...

That's how the crash started. We are watching it in the making, slow motion, but inexorable as a juggernaut. The first body to come to surface was New Century. Then Bear Stearns, the kagaroo funds, and more recently, American Home Mortgage. Just to mention the ones that made the headlines. Let's always keep in mind that it all started with stupid lending, the most prolific historical recipe for financial turmoil. The Fed overreacted to the market correction of 2000/2001. Made the economy awash of money. The money migrated to real estate. Eventually everyone who could walk into a mortgage shop could buy a piece of the bubble, in a gigantic "Ponzi scheme".

Why the comparison to the scheme? Because it would be impossible to end without a crash for the late entrants. Why would one individual take an interest-only ARM loan? Because he could not afford the fixed-rate. What will he do when the rate resets? Well, if one can not afford lunch, he will not be able to afford dinner either, isn't that right? So that individual is left with only two options: to take a second-lien mortgage to continue to pay the debt - which is equivalent to eat his own arm for lunch - or to default. Considering that the first option only works as long as the real estate price goes up, when it comes down - as the situation is now, countrywide - the only option left is defaulting.

So far this year only 20% of the brouhaha was reset, around 200 billion dollars. The worst has yet to come. And it will come. In the following months during the second half of this year more than 300 billion dollars in subprime loans will reset. In February and March next year alone, almost 200 billion more will come to play. More than 80% of the real estate sold in California in recent months were interest-only loans. Hedge funds are already losing a phenomenal amount of money. They have CODs, which consist of packs of Mortgage Backed Securities, which in turn are packs of mortgage loans. CODs have their "value" determined by "analysts". Smells an awful lot like Michael Milken's rating of junk bonds.

Let's not forget that AHM did NOT operate in the subprime field. Filed for bankruptcy this week. The lenders cut it off. Big guys are coming to assuage the fears of the market. But the fact of the matter is the the snake's eggs have been laid already. There is no way out. The dam is going to burst. The outcry for the Fed's intervention resembles to the crushed hopes the same kind of speculators had in 1929. Someone with less scruples hinted that Fred Mac and Fannie Mae step in to bail them out. That is almost criminal: they profit handsomely from the mess and give the taxpayers the burden of sorting it out. The plain definition of (im)moral hazard.