Well, I'd started this thread hoping to discuss the AIG failure & its far reaching tenacles into America but it's been all about housing. I've got one arm tied behind my back in that area but I can discuss 50-year mortgages. Fifty year mortgages are typically 5/1 ARMs at a quarter percentage point higher than a 30-year loan. Over the first five years of the loan, the borrower pays about 0.25% more than a typical 30-year fixed rate mortgage, but after that, the rate adjusts annually to match the prime lending rate. Since we have no idea what will happen with interest rates five years down the road, the only way to really evaluate the 50-year loan is over the first five years. Lets say that were buying a $250,000 home and we have a $50,000 down payment. We can either take a 30-year loan at 6%, or a 50-year loan at 6.25%. On the 30-year mortgage, your monthly payment would be $1,199.10. With the 50 year mortgage, your monthly payment (for the first five years, as mentioned above) would be $1,089.95. So far, so good for the 50-year mortgage but if we keep comparing it's not so great going forward. Lets say that in 5 years youre ready to sell the house and move on. Also assuming that your house value went up 10%, so now its worth $275,000. For the 30-year mortgage, you still have a balance of $185,840, which means that you now have $89,160 in equity in the house. On the other hand, with the 50-year mortgage, you still have a balance of $196,544, which means you have only $78,456 in equity in the house. With the 30-year mortgage, you have $10,704 more in equity after five years. Now, the difference in your monthly payments is $109.15, so over 6-months, youll pay $6,549 more with the 30-year loan, but you end up with $10,704 more in home equity. Thats a 63% return over five years, or about 11% a year. I dont know about you, but if I can afford an investment that returns a guaranteed 11% a year, Im quite willing to dump $110 a month into that investment. In short, a 50-year mortgage simply isnt worth it. A 30-year mortgage is actually an extremely good investment versus a 50 year, and were not even considering the bad things that can happen when your rate adjusts with the 50 year. Theres pretty much no reason to ever consider getting a 50 year mortgage unless you enjoy handing a lot of money to your mortgage company with nothing in return. I watched CNBC last night until 9:00 p.m. The future were at +215 when I got up at 2:00 a.m. to use the facilities. Now, since the announcement of the MM fund guarantee they've jumped to +338. It's going to be another interesting day. This is a very far-reaching legislation. I know there was a run yesterday on MM funds & something had to happen quickly but I sure hope they take the time to think this thing through carefully...sometimes, the cure is worse than the disease?? Blocking short sales is draconian, IMO, & really interfers in the free market. Shorts help us to spot problems (remember Enron?). Don't like this blocking short sale business at all. If somebody's spreading negative rumors & then short trading on those rumors...that's already illegal. Gosh, I've traded short several times over the past year & I'm certainly no "corporate raider". Anyway, there's LOTS to digest this morning & probably more to come... /tricia

It is far easier and in the end more profitable for Inman as well as other media outlets to attempt to place the blame on the average person Âas opposed to the hugely powerful RE/finance community. AndÂsince they have a certain percentage of the population eating out of their hands in actually falling for the party line that it is all because of the borrowers, one canÂt really blame them for continuing to pretend that the emperor really is wearing clothes. Which begs the real questionÂwho is the most "stupid"? Those who did not know better, and got themselves into a pickleÂÂ.or those who continue to remain in denial in terms of the fact that those who caused the problem, have made millions and more doing soÂand, are rewarded for their "accomplishment"? Once againÂfollow the $$$$$$$$$$$$$$$ Here is another story about just how far reaching this game has become..with a whole new twist...lengthy, yes...but worth reading... Excerpt: "....The Mahers claim Lehman's money managers were negligent and violated federal securities regulations when they placed more than half of the $600 million in so-called auction rate securities allegedly tied to two now-troubled bond insurance companies, MBIA and Ambac Financial. The outcome of the dispute, experts said, may hinge on whether the Mahers can prove the choice of investments was a deliberate attempt by Lehman Brothers to dump securities on an unwitting client as the sub-prime mortgage crisis boiled over last summer. For years, auction-rate securities were considered good investments for institutions and wealthy individuals who wanted to park their money for a short time and still earn an attractive interest rate. They were seen as alternatives to money market funds and short-term commercial paper. They were also considered safe. Auction-rate securities are debt instruments -- issued by entities such as municipalities, hospitals and housing finance agencies, as a way of generating money. While they are rated as long-term bonds, they are sold as short-term securities at periodic auctions, hence their name. The auctions occur as frequently as every seven days when the interest rate is reset. Every time an auction is held, investors are able to pull out their original investment plus interest as other buyers replace them. While the high yield and ability to access the money are benefits, the single biggest risk is that an auction will fail -- that there won't be buyers to replace the original ones. When that happens, the value of the security can plunge. But it's so rare as to be almost inconceivable. That's why no one was prepared for what happened last summer when subprime mortgage market collapse. THE AUCTIONS FAIL The lion's share of the Mahers money, according to the claim, was invested in auction-rate securities tied to the bond insurers MBIA and Ambac Financial. Bond insurers write policies ensuring lenders will be reimbursed if the borrower can't pay back the money, and they play a critical role in the debt market. State governments, for instance, cannot raise money by selling bonds without insurance. But over the last few years, the insurers entered into riskier investments such as subprime mortgage securities. Now, they're under fire from debt rating agencies, who fear they don't have the cash to cover claims. In early August, the Mahers claim Lehman used nearly $168 million of their money to buy auction-rate securities despite an earlier failed auction, which prevented a set of similar corporate securities from being sold, according to the Mahers claim. Around Aug. 14, Lehman tried to sell a security held by the Mahers. That auction also failed. Four days later, the Mahers allege Lehman reinvested more than $57 million despite three more failed auctions. Lehman declined to comment on specific allegations. By late August, roughly a month after the account was opened, John Liu, the Mahers advisor-friend, received a monthly portfolio statement from Lehman detailing some of the investments. In two e-mails to Will Gourd, one of Lehman's money managers, Liu complained about the firm's choices. In the claim, the Mahers said Lehman liquidated a small portion of securities in their portfolio, but "either did not or could not liquidate a majority of them, as the auctions associated with them failed and continue to fail." At least one of the securities that could not be sold, dubbed Double Oak Trust Series 2007-1, was insured by MBIA. What that means for the Mahers is this: $286 million remains tied up in securities that cannot be sold because no one wants to buy them. But what's worse, no one is certain what the securities will be worth once the credit crisis passes. Typically, brokerage firms require investors to sign an agreement saying they will arbitrate any problems. So, it will be left to the arbitrators to decide whether Lehman did something wrong or whether the Mahers were swept up in a set of circumstances that turned what would be an ordinarily safe bet into a bad one. "It's likely Lehman is going to tell a different story," said Thel, the Fordham professor, before adding, "If the facts are as they allege, they (the Mahers) have a substantial chance of prevailing." Charles Jones, a finance professor at Columbia's Graduate School of Business, said arbitrators will take into account what was promised by Lehman and the sophistication of the Mahers. "They could be sophisticated businessmen, but that does not always translate to sophistication about investments," he said. "It will depend on a whole set of factors that are impossible for us to see as outsiders." "

I got this from a newsletter which I highly recommend written by John Mauldin although I just read it for curiousity not investment advice It seems to illustrate Bear Sterns is just the begining and if interest rates go up more we will be in a pickle. Altough he seems to indicate at the end that interest rates will eventually go down in response to a slow down This Week in Outside the Box we Join Bill Gross of Pimco in his July 2007 Investment Outlook as he strives to address the implications of the Bear Stearns hedge fund debacle, the toxic waste that is Wall Streets' innovative derivative products and their respective valuation, rather, lack thereof. If Dear reader you have not been party to the excess of the Wall Street you may have not heard of the two Bear Stearns hedge Funds focusing on the subprime market that were subsequently liquidated on account of their inability to meet margin calls, thus wiping out investors. Mr. Gross believes that while significant, we ought not to look to Wall Street to see the repercussions of our excess but to the heart lands of America and the real estate there financed via subprime loans to witness the true folly of our capitalist ways. John Mauldin, Editor Looking for Contagion in All the Wrong Places Investment Outlook Bill Gross : July 2007 Whew, that was a close one! Ugly for a few days I guess, but it could have been much worse! No, I refer not to Paris Hilton upon her initial release from the LA County pokey after serving three days of hard time, but to the Bear Stearns/subprime crisis. Shame on you Mr. Stearns, or whoever you were, for scaring us investors like that and moving the Blackstone IPO to the second page of the WSJ. We should have had a week of revelry and celebration of levered risk taking. Instead you forced us to remember Long Term Capital Management and acknowledge once again (although infrequently) that genius, when combined with borrowed money, can fail. But (as the Street would have you believe), this was just a close one. Sure Bear itself had to come up with a $3 billion bailout, but folks, most of these assets are worth 100 cents on the dollar. At least that's how they have 'em marked! Didn't wanna sell any so that someone would think otherwise...no need to yell "fire" in a crowded theater 'ya know. After all, hasn't Ben Bernanke repeated in endless drones that financial derivatives are a healthy influence on the financial markets and the economy? And aren't these assets well...financial derivatives? Besides, I direct you to the investment grade, nay, in many cases AAA ratings of these RMBS (Residential Mortgage-Backed Securities) and CDOs (Collateralized Debt Obligations) and defy you to tell me that these architects were not prudent men. (Sorry ladies, they are still mostly men!) Well prudence and rating agency standards change with the times, I suppose. What was chaste and AAA years ago may no longer be the case today. Our prim remembrance of Gidget going to Hawaii and hanging out with the beach boys seems to have been replaced in this case with an image of Heidi Fleiss setting up a floating brothel in Beverly Hills. AAA? You were wooed Mr. Moody's and Mr. Poor's by the makeup, those six-inch hooker heels, and a "tramp stamp." Many of these good looking girls are not high-class assets worth 100 cents on the dollar. And sorry Ben, but derivatives are a two-edged sword. Yes, they diversify risk and direct it away from the banking system into the eventual hands of unknown buyers, but they multiply leverage like the Andromeda strain. When interest rates go up, the Petri dish turns from a benign experiment in financial engineering to a destructive virus because the cost of that leverage ultimately reduces the price of assets. Houses anyone? Oh, I kid the Fed Chairman - and I should stop because this is no laughing matter, and somehow I have a suspicion that this "close one," this Paris Hilton charade of a crisis, is really so much more than just a 3 or 27 day lockup in the LA County jail. Those that point to a crisis averted and a return to normalcy are really looking for contagion in all the wrong places. Because the problem lies not in a Bear Stearns hedge fund that can be papered over with 100 cents on the dollar marks. The flaw resides in the Summerlin suburbs of Las Vegas, Nevada, in the extended city limits of Chicago headed west towards Rockford, and yes, the naked (and empty) rows of multistoried condos in Miami, Florida. The flaw, dear readers, lies in the homes that were financed with cheap and in some cases gratuitous money in 2004, 2005, and 2006. Because while the Bear hedge funds are now primarily history, those millions and millions of homes are not. They're not going anywhere...except for their mortgages that is. Mortgage payments are going up, up, and up...and so are delinquencies and defaults. A recent research piece by Bank of America estimates that approximately $500 billion of adjustable rate mortgages are scheduled to reset skyward in 2007 by an average of over 200 basis points. 2008 holds even more surprises with nearly $700 billion ARMS subject to reset, nearly ¾ of which are subprimes. It was not supposed to be this way. 1% teasers or 3% 2/28's were supposed to be rolled with no points into something resembling...well...1% teasers and 3% 2/28's. Instead today we have nearly 7% fixed rate mortgages and not a teaser to be found. Congress, regulators, even Fed officials are stepping in and warning mortgage originators (even mortgage buyers!) that they'd better be careful and only make good loans. Those nasty capitalists! They must have gotten carried away a few years ago. Somehow all those BMWs in the New Century parking lot in Irvine, California didn't attract much notice in 2006. Now, well, there's nary a Prius to be found there, but lots of outraged politicians in Washington, that's for sure. The right places to look for contagion are therefore not in the white-washed Bear Stearns hedge funds, but in the subprime resets to come and the ultimate effect they will have on the prices of homes - the collateral that's so critical in this asset-backed, and therefore interest-sensitive financed-based economy of 2007 and beyond. If delinquencies lead to defaults and then to lower home prices, then we have problems and the potential for an extended - not a 27-day Paris Hilton sentence. Take a look at Chart 1, which graphically points out the deterioration in subprime ARM delinquencies. Escalating delinquencies of course ultimately lead to escalating defaults. Currently 7% of subprime loans are in default. The percentage will grow and grow like a weed in your backyard tomato patch. Now I, the curmudgeon of credit, am as sure of this as I am that the sun will set in the west. The uncertain part is by how much. But look at it this way: using the current default rate of 7% (3-4% total losses), the holders of some BBB investment grade subprime-based CDOs will lose all of their moolah because of the significant leverage. No need to worry about fictitious 100 cents on the dollar marks here. One hundred percent of nothing equals nothing. If subprime total losses hit 10% then even some single-A tranches face the grim reaper. AAA's? Folks the point is that there are hundreds of billions of dollars of this toxic waste and whether or not they're in CDOs or Bear Stearns hedge funds matters only to the extent of the timing of the unwind. To death and taxes you can add this to your list of inevitabilities: the subprime crisis is not an isolated event and it won't be contained by a few days of headlines in The New York Times. And it will not remain confined to a neat little Petri dish in some mad financial derivative scientist's laboratory. Ultimately through capital market arbitrage it will affect risk spreads in markets completely divorced from U.S. housing. What has the Brazilian Real to do with U.S. subprimes? Nothing except many of the same bets are held in hedge funds that by prudence or necessity will reduce their risk budgets to stay afloat. And the U.S. economy? Of course it will be affected. Consumption will be reduced to say nothing of new home construction over the next 12-18 months. After all, attractive subprime pricing has been key to the housing market's success in recent years. Now that has disappeared. Importantly, as well, and this point is neglected by most pundits, the willingness to extend credit in other areas - high yield, bank loans, and even certain segments of the AAA asset-backed commercial paper market should feel the cooling Arctic winds of a liquidity constriction. If not taken too far - and there is no hint yet of a true "crisis" - these developments may be just what the Fed has been looking for: easy credit becoming less easy; excessive liquidity returning to more rational levels. Still, PIMCO looks for the Fed to issue an insurance policy in the form of lower Fed Funds at some point over the next 6 months. And what happened to our glass half-full secular thesis of last month? We still believe in strong global growth, but...as we also suggested...that the U.S. housing downturn will affect growth and short-term yields over the next year or so. We remain consistent and resolute. Contagion? Maybe, but you won't be finding it at "99.9%" pure Bear Stearns. Look for it instead, in the subprimely financed homes of Las Vegas, Rockford, Illinois, and Miami, Florida. This problem - aided and abetted by Wall Street - ultimately resides in America's heartland, with millions and millions of overpriced homes and asset-backed collateral with a different address - Main Street. William H. Gross Managing Director

Yes, the unfunded liabilities are going to be the death of Detroit. All they have to do is stop paying the GM or Chrysler or "Fords" pensions, and all of Michigan dies. Those pensioners have vacation homes "up north," where tourism is the whole economy. Actually, they just have to stop payiing for retirement health care and we get the same results. My previous DH's dad lost his pension when Jones and Laughlin (later, US Steel) reneged on their pension obligations to the northern Minnesota taconite miners. He got a fraction of what he was supposed to get because the Pension Benefit Guaranty Corporation had to take over paying the miners their pensions. He worked his whole life welding the mining equipment, built his home debt-free as he had the money, raised four children, and died gasping from the lung damage he got from his job. How well do you think the Pension Guaranty folk are going to do spreading the money around when it isn't a few miners and steelworkers, but several industries at once? What is dragging at the economy? Perhaps the unfunded war? The gears are grinding slower and slower and I just hope we have not already lost too much momentum. Has anyone else read The Sheep Look Up? Didn't John Brunner predict well how a confluence of errors and neglect could do us in? I'm just on a real downer tonight. DF-in-L went back to the hospital and is just not coping at all well with unexpected health problems.