Subprime Mortgage Meltdown Has Far Reaching Effects

September 3, 2007

Lending money to high risk borrowers then packaging and re-selling the debt in ways that were supposed to reduce the risk didn’t turn out so well for the financial markets.  A recent article in Business Week takes a look at these risky investments and Matthew Goldstein put together a list of the different areas affected by the subprime problem.

-Surging mortgage defaults
-Dropping home prices

Rating Agencies
-Criticized for not downgrading the risky investments backed by subprime mortgages

-Adjustable rate mortgages are coming due
-Ripple effect of subprime shockwave has hurt the whole stock market

Commercial Paper
-$1.2 trillion asset-backed market is drying up

Investment Banks
-Brokerage stocks have taken a hit since investors are worried about their bond underwriting

Private Equity
-Risk-averse investors have created a credit crunch
-Banks have a $300 billion backlog of deals

Hedge Funds
-Funds backed by pools of subprime mortgages have lost tremendous value, for example the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund has gone into bankruptcy

I think this ripple effect caused by problems in the mortgage market reinforces the importance of diversifying your investments. If your money is spread over many different types of asset classes and industries it can help soften the blow of a far reaching investment crisis.


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