Well done! Wish I would have come across it much earlier.

Two questions for you.

1. I don't quite understand the math with BILLIONS upon billions of dollars being lost. I know you talk about the fact that there is no way to value the holdings, but it seems so far overreaching. My simple mind says the total loss should be = ( # of sub-prime mortgages * some % (loss in value) * mortgage amount). I don't know how many sub-prime mortgages are out there, but is it really billions upon billions?

2. So, now that we are in the mess that we are in, do you have any suggestions on what an investor is to do or recommendations for further reading?

Thanks!

Hi Katy,

Thanks for the comment I am glad you like the series.

Your logic in thinking about how the losses from the mortgages would be calculated is moving in the right direction. Without making things too complicated the only thing that I would say you are missing there is that a mortgage is generally worth a lot more than the mortgage amount because the borrower pays back not only this amount (the principal) but also the interest on that loan.

To answer your question according to the below article from the Wall Street Journal the mortgage market was valued at $10.2 Trillion in 2006 and 12.5% of that was subprime. Although the data is a little data that gives us a rough number of around $1.3 Trillion for the value of the subprime market.

The Subprime Market's Rough Road - WSJ.com

As far as what investors should do here I am not a registered financial adviser so I can't give anyone advice. From an educational standpoint however I think the main thing that can be learned from following the subprime mess is that it gives you a guage of how long it is going to take the economy to turn around and where to look for those clues (housing market and financial stocks).

Hope that helps.

Best Regards,
Dave

Sir,

I have two questions:
1. A system of independent checks had been established by lenders in the industry. These were: home appraisers, mortgage brokers and rating agencies. (Is this list complete/correct?) To what extent have the failings of these people contributed to the sub prime crisis?
2. From your article, I have come to the conclusion: there is no future for sub-prime markets. Is this conclusion correct? What methods are being planned (if any) to stop such a market from emerging again in the future?

Regards,
Gautam

Hi Gautam,

I have answered your questions below in the order received.

Yes, I guess you could say that there was a loose system of independent checks in place by the people you have listed here. While I there may be something I am not thinking of, I don't think many would argue that home appraisers played much of a role one way or another however in either contributing too, or raising the red flag on this crisis.

One of the main problems that people do point to however is the role that mortgage brokers played. What people are basically saying is that borrowers viewed their mortgage brokers as looking out for their best interests. Instead of doing this however many argue that the mortgage brokers took advantage of their clients trust, to squeeze as much out of them as possible in the way of fees. Many are also saying that these same brokers bent the rules so people could qualify for loans that they could not really afford.

Many people also argue that ratings agencies who rated the securitized debt (mortgage backed securities etc), and were supposed to be unbiased, actually rated the debt better than it should have been rated. The people who argue this basically say this was the case because there was a conflict of interest with the ratings agencies, because they are paid to rate the debt by the company that owns it.

I think most would agree that the failings of the mortgage brokers and ratings agencies played a fairly large role in this crisis.

Definitelyin the short term I would say that there is not much of a future for the subprime markets, because there is so much of this bad debt floating around now, that the system needs some time to flush it all out.

In the intermediate to longer term however, I do think that there is a need and a market for subprime lending and therefore I do think we will see more of this down the line.

There are many things being planned to help make sure that this does not happen again including stricter regulation of the mortgage industry and more oversight over the investment banks that securitize these assets.

Hope that helps. Please let me know if there are any other questions or concerns.

Best Regards,
Dave

Hey David,

Great show...keep it up.

Dear Mr.Waring,

Thank you for enlightening me. I have one question to ask; how is the subprime crisis affecting the economy as a whole?

Thanking You
Jayant

Hi Jayant,

Glad to hear from you.

That's really what this series was developed to answer so if you have watched the whole series and there are specific things that you do not understand then I am happy to help.

Best Regards,
Dave

__________________
Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Your explanations go a long way in helping us understand what is going on. Simple explanations are difficult to find, keep them coming.
Joe P.

Hi Joe,

Thanks for the compliment I am glad that you like it.

Best Regards,
Dave

__________________
Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Well Done! This is the best material available on the net.

I would really like to understand how the current political scenario (Policies) would impact the Sub-Prime Crisis.

I heard that Obama is talking about increasing the Taxes!? Exactly how would increasing taxes be justified in the current scenario? In my opinion, this would just boost inflation & reduce money supply in the already shaken economy. Is there another aspect to this that I am not seeing?

Thanks!
Raghav