Pinocchio Time

From Bloomberg, we have Paulson Says Bad Debts in the U.S. to Be Contained.

U.S. Treasury Secretary Henry Paulson moved to cool concern about rising defaults at subprime mortgage companies, saying the woes won't spill over to banks that make less risky loans.

"Credit issues are there, but they are contained," Paulson said to reporters in Tokyo during a four-day tour of Asia. The U.S. financial sector is healthy and most institutions won't feel "a big impact."

This is a flat-out lie, or if I wanted to be more charitable, this is cheerleading at best.

Why?

Subprime refers to people with less than stellar credit. We used to refer to these people as deadbeats but political correctness has transformed them into "sub-prime", as in "less than prime", in fact, "a lot less than prime."

Typically, these people have very little income, or a lot of debt, or both. The reason that these subprime mortgages are going under is because the borrowers have no capacity to pay it back, and foolish investors are just waking up to smell the lovely aroma of horse-manure.

Obviously, they should never have been given the debt in the first place (but let's not argue about that.)

Now, the mortgage pool is stratified by credit worthiness ("Alt-A" and "prime" mortgages) but there is virtually no difference (in a practical sense) between a sub-prime borrower who makes $25K, and takes out a mortgage for $150K, and a prime borrower who makes $100K, and takes out a mortgage for $600K.

The important point is that neither of them has the capacity to repay the debt!

This should be absurdly fucking obvious to anyone with an IQ higher than that of a lobotomized amoeba!

And the latter category is all over the place. California, Florida, Massachusetts, New York, New Jersey, Connecticut, Illinois... (in short, the most populous states.)

The very fact that they created an "Alt-A" (which, is not an "A") is a dead giveaway that these people should never have been given the money in the first place, and an even bigger giveaway to investors that they should never have financed this lunacy in the first place.

So why is the shit not hitting the fan for Alt-A mortgages? Well, higher income households can hide a little bit longer than someone who makes $25K, but they can't hide indefinitely. The day of reckoning is coming, and I'd even go out on a limb to argue it's going to be here in less than six months.

The important point is that you don't get to be the former CEO of Goldman Sachs (as Paulson used to be,) by not understanding finance. To argue that he doesn't grasp the above is absurd in the extreme.

Liar, or cheerleader? You decide!