The Golden Sieve:
Instruments of profit
During 2007 and 2008, everyone, (including those outside of the financial markets), became aware of the housing and credit crisis.
As individuals struggle with the loss of equity and income, and many lenders fall to the wayside, there is a growing trend that we are calling, The Golden Sieve.
Last month, during a conference for hedge fund owners and managers, several reports fell softly from the press. Of particular note was the announcement that several hedge funds were gearing up to purchase unwanted mortgage notes, (whole notes, or loans, not slices of them as in CMO's). In addition, they were planning on purchasing the growing number of foreclosed properties.
A few weeks later, there was an announcement of a new company, put together by a consortium of hedge funds, called PennyMac. This is a play on the name, FreddieMac, which is a government sponsored organization that provides mortgage lending. It was one of the first organizations which made use of CMOs, (Collateral Mortgage Obligations), (the packaging and selling of slices of mortgages as investments). These financial instruments were considered a great innovation when they were created in the 1980's by an uneducated Wall Street mortgage broker, Lewie Ranieri, a Salomon Brothers' employee. Ironically, they have allowed many institutional investors to profit from purchasing slices of mortgages, and have been a fundamental component of the current housing bubble and credit crisis.
Now, those from the same groups who created the bubble, burst the bubble, and also profited as it burst, (through short positions), are busy creating new innovations. These new mechanisms are designed to catch pieces of lost value as they fall through yet another, Golden Sieve.
To learn more about this and other objects related to this story, go to the Options Pipeline.
Comments