Monday, August 13, 2007

Simple Wisdom

I am no expert in investing.  However, I do believe a few things sacred to small investors - 1) think long-term, as you cannot be a day-trader and beat the market in the long run. 2) develop a diversified portfolio, it is tempting to put all that money in google shares, but it is wise to buy ETFs and index funds instead.

Reading this article brought a smirk on my face.  No matter what the unusual conditions on the markets might be, it does not make sense to bail out a hedge fund in trouble.  I am pretty sure that most of the aforementioned fund's investments must be in mortgage backed securities (read sub-prime mortgages).  When a low income family is actually living in a house that is worth 500k on paper, sure, there is something fishy in there.  And, belive it or not, a lot of hedge funds have invested in such "zombie" assets.  To begin with the house was not worth 500k, second, the family could never have sustained payments when interest rates rose, and finally, the #$%^& bankers cared nothing for except their closing costs anyways.  The reason i say that is because you never know who the final underwriter of such loans will be. For our house in sterling heights, MI, we started with and finally ended up with Chase Home Finance.  It turns out is just a sales-lead portal which referred me to Rock financial owned by Quicken Loans - which first signed us up for the loan and then finally it turns out that Chase was the final underwriter. Now, don't even ask me who Chase actually sold it to and which hedge funds have invested in the securities that are backed by the mortgage that I own.

Now, when I actually refinanced the home, the appraiser estimated my house at 215K, and I don't know which magical algorithm he had used to come up with that figure. I am sure that his firm must have been paid off pretty well  - to hyperinflate the house prices so that they can offer poor souls like me huge home equity at enticing prices. 

All this falls apart, when there is a correction in the market, the real value of the house goes down - house owners end up with mortgages larger than their houe values, and on top of it are also saddled with home equity (that never existed) debt. 

Talk about bailing our hedge funds.  Perversely, I am happy that a large wall street firm like Goldman has done this. Because, I want them to suffer, and realize that it is their own wrongdoing. Amen.

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