So, what happened to our economy? A (very brief) primer on the credit crises...

Confused yet? Me too, and I know what’s going on and follow it closely! Let's quickly review. Huge Investment Bank (HIB) encouraged mortgage banks all over the country to make home loans, and then they would purchase these loans and package them into large securities called Residential Mortgage Backed Securities or RMBS. They generally grouped the loans together as to their initial quality as in prime mortgages, ALT-A and the now infamous subprime mortgages. They also grouped together second lien loans, which were the loans generally made to get 100% financing or cash-out financing as home owners borrowed against the equity in their homes.

Typically, a RMBS would be sliced into anywhere from 5 to 15 different pieces called tranches. They would go to the ratings agencies, who would give them a series of ratings on the various tranches. The top level was typically rated AAA with rights to get paid back first, then AA and so on down to junk level. Since it was hard to sell the lower levels they were put into another security called a Collateralized Debt Obligation or CDO. And yes, they sliced them up into tranches and went to the rating agencies and got them rated. The highest tranche was typically again AAA. Through the alchemy of finance, HIB took subprime mortgages and turned 96% of them into AAA bonds. This is like taking nuclear waste and turning it into gold. Clever trick when you can do it, and everyone, from mortgage broker to investment bankers was paid handsomely to dance at the party. The ratings agencies used data supplied by the investment banks on what the likely default rates would be. (Like taking an open book test where you get to write the questions). They were expecting a 2% default rate. Now they think more than 30%.

Up until 2003, all investment banks were allowed only 12 to 1 leverage. Then in 2004, the SEC basically gave five banks (and only five banks) the ability to lever up 30 or even 40 to 1. Bet you can guess the five banks. Bear, Lehman, Merrill, Morgan and Goldman. (Like inviting the fox into the hen house or... cougar to the college bar). Well, three down.

What does this mean to you and me?
The massive deleveraging of our economy will basically take out all the money for stability and growth. That’s why the Fed is rushing to bail out the (entire) economy. Even if it works (and I believe it will), the recovery will take much longer than they want us to know. Couple that with the Demographic Tsunami about to hit the US and an investors’ nightmare exists. (I discuss this depth in my recently published Special Report: An Economic Tsunami Lies Ahead. How to prepare for this perfect storm! - Be sure to read it…twice.) I hope you know by now that I am not a pessimist or non-believer in America . To the contrary. I have been bullish for most of my 25 years in the industry….but the facts are the facts and they cannot be ignored. Maybe I’m being overly conservative by sounding alarms for months now, but I’m still here after 25 years and most of my peers are not. I can’t stress enough: Your financial well being and ultimately your way of life depend on you being ready for what’s happening.

Market Outlook: A new Bull Market is a long way away, BUT there will still be decent rallies. Don’t be fooled into thinking it’s a new Bull Market. It’s not. Use the rallies to rebalance your portfolio. A very different asset allocation will be necessary to succeed for the next few years.

**If you would like a complimentary review of your portfolio, to make sure you are not taking too much risk and to make sure you are invested properly, be sure to contact me ASAP. I’ll be happy to discuss it with you.

Good luck and keep the Pepto-Bismol close by.

Cheers –Keith

916-925-8900

keith@KeithSpringer.com

P.S. If you would like a free copy of my Special Report: An Economic Tsunami Lies Ahead. How to prepare for this perfect storm! I have a few complimentary client copies left so just let me know.

P.S.S. I also have a detailed explanation of the bailout if you want.

Keith Springer is President of Capital Financial Advisory Services, a registered investment advisor, providing Wealth Management and Mortgage Consulting Services.  For more information on how to build and maintain a solid retirement plan, please contact Keith at/i>
916-925-8900 or Keith@KeithSpringer.com