Smart Borrower Blog

Hedge Funds And The Sub Prime Mortgage Market

Dec 23rd, 2007 @ 4:27 PM by Alden Smith

I often times feel like the devil’s advocate for what I report on here at the Mortgage Mentor blog. I can guess that some people would accuse me of being a bit slanted in my way of looking at the current mortgage situation, and that I, as a self-proclaimed non-authority on the big business of finance, haven’t a clue. That may well be true, and I certainly feel that way some times. What I report on is the news. When I read in the news article by reporters and financial experts, it is their opinion on a subject that I am interested in. I feel it my duty to report it here on the blog. And that is what I do. If it is all seemingly gloom and doom, then that is how I see the situation for a lot of fellow Americans. As someone who came up the hard way, my roots are there. And so what affects them is what I see. I apologize to anyone that has a different opinion. But when I read stories fairly reported, I think bringing it forward and presenting it here is my obligation. I have questioned my editor on my content, and she has given me the privilege to write on what I feel important. And that, folks, is where it is at. Blessings to Lauren…

I have been reading about the role of hedge funds in the current market situation. It is interesting stuff, even though I at time have a bit of trouble sifting through some things. I read this AM that hedge funds have played a significant role in the current mortgage crisis. The report, based on an article by IMF’s Finance and Development mag’s Randall Dodd, a Senior Financial Expert in the IMF’s Monetary and Capital Markets Department, was interesting. As in all finance, we oft times never get the opportunity to see the real players.

So it is with hedge funds. My understanding of them is that they are vehicles which invest in largely high-risk ventures, are not transparent entities, and operate on highly leveraged amounts of money. Being non-transparent, it is hard to know where the money comes, where the money goes. In a situation such as this, it could take months or years to unravel a situation. With packaged securities that banks sell to
local and international investors, we have little knowledge of who is hurt and who is not. One can understand the bank’s position. And there is no law against investing, even in hedge funds. To my way of thinking, though, when the Fitch Ratings warned as far back as 2005 that a crisis was approaching, and yet investors and funds forged ahead, I have to wonder why someone did not step in to say “enough is enough” and do all that could be done to prevent the situation we are now in.

Regardless, the tranches were placed in the position that hedge funds could capitalize on them, which they apparently did. Because hedge funds, which are unregulated, have little capital outlay, they take huge risks on the market they are involved in. It looks to me like hedge fund managers have gambled, and lost.

I haven’t a clue how all this money is moved around. I suspect only a very few people do. To me, if you gamble on high risk, and get burnt, that is your problem. When you gamble and lose, and many people are hurt, that to me seems a very different situation. I sincerely hope someone corrects me if I am wrong.

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