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James Cramer "bloody And Bloodier"

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Bloody and Bloodier

The subprime-lending crisis is worse than you think, and could crush

financial and real-estate markets for years.

By James J. Cramer

You're losing money right now. This very minute. You're losing money if

you own an apartment. You're losing money if you own a country home.

You're losing money if you own a stock or bond mutual fund. You're

losing money if you have a pension plan. You're probably losing money

here or there, you're probably losing money everywhere (except maybe

from your savings account and wallet). But this is no Dr. Seuss story.

It's more of a John Steinbeck tale, and we are the victims, a new

generation of Tom Joads, and it's the damn bankermen who broke us. No,

there won't be a police officer to investigate, and the government, at

least this federal government, won't save us.

Our tale of woe starts not in New York but in flashy places like Las

Vegas and South Beach and faraway onetime Okie haunts like Riverside,

San Bernardino, and Ontario, California. In these towns, and dozens more

like them, housing companies erected colossal communities of homes.

Eager homebuyers and speculators fought each other for these properties,

armed with cheap financing, courtesy of Alan Greenspan, who wanted to

boost an economy reeling from 9/11 and create a legacy of homeownership

for all, including those who could not document steady income or, for

that matter, citizenship.

We think of him as Saint Alan now, but in a few years he will be known

as the reckless Fed chairman who encouraged the creation and use of

exotic mortgages that required you to put down very little money, odd

creations like the "2 and 28," an adjustable mortgage with low interest

payments the first two years that explode into gargantuan fees for the

next 28. Don't have the money to pay for the 2 before the 28? Go

"piggybacking": Take out a home-equity loan against your new house to

meet those minimal payments.

Where did the money come from? Banks lent it, mortgage brokers lent it,

and even home builders themselves got into the act. The housing markets

were so hot the lenders barely had time to check if their buyers were

deadbeats, cheats, speculators, or actual honest-to-Betsy hardworking

people who wanted nothing more than what Tom Joad wanted 70 years ago.

Oh, and the buyers didn't have time to check out the terms, either; the

value of the houses was going up too fast.

Gotta close now! Nor did the regulators tap the brakes?whoops, there

were no regulators. If something went wrong, who cares? The buyers could

always sell their ever-appreciating home to the next guy on the

reservation list or the ten after him. The builders, brokers, and

bankers then shipped these mortgages east to the big Wall Street firms,

which bundled them together and merchandised them as high-yielding bonds

often backed up by nothing more than the full faith and credit of, well,

no one.

Over and over, Greenspan hailed these fabulous financial breakthroughs

that gave everyone a chance at the American Dream (or multiple dreams,

in the case of speculators who took down homes and flipped them). And

why not? Don't homes always increase in value? Won't there always be

willing buyers armed with ARMs?

Except that wasn't how it went down. The same guy who prescribed the

mortgage elixir for all Americans then laced it with seventeen straight

interest-rate increases, increases that brought rates to levels so high

that legions of people who bought a home with a teaser rate couldn't

afford the payments. Between 2004 and 2006, just as interest rates

started spiking and homes kept being churned out in these saturated

areas, 14 million families purchased houses, many taking advantage of

teasers and piggybacks. Given that the average home went for about

$250,000, that's hundreds of billions in loans that cost a lot more per

month than when they were taken. Now these people are stuck. They can't

refinance because the rates are too high, and they can't sell their

homes to repay their mortgage, either. In every area of this country?and

in particular, in the once-hot markets like the ones I mentioned

earlier?there are just too many other homes for sale and too many new

homes still being pumped out.

What do the woes of these folks have to do with you? Can a housing fire

sale in Phoenix or Fort Myers really affect your Hamptons beach house or

your newly purchased Upper West Side classic six? Well, yes, and in even

bigger ways than you might think. That's because the people who

ultimately bought the bonds backed by what now look to be billions in

bogus mortgages are those who run most of the big pension-, hedge-, and

stock-and-bond-market mutual funds in this country. These suckers bought

such bonds because bonds backed by mortgage-payment streams paid a tiny

bit more than United States Treasuries, a comparable low-risk, if

low-return, vehicle, and were supposed to have very little or no risk

themselves. Some managers, however, borrowed huge sums to buy tons of

these mortgages to turbocharge their results. And the most aggressive

managers bought billions in mortgages given to less creditworthy

individuals, the so-called subprime loans you keep hearing about.

Even though these loans have been losing value for years, it wasn't

until June

2007 that any of this mattered. That's because of what is known in the

trade as the "marks," the value of a stock or bond as it's "marked" by a

firm. You are getting poorer by the second because many of these

mortgage bonds were priced way too high because nobody thought that

large numbers of borrowers would ever walk away from their homes rather

than pay the interest that backed the bonds.

Such a disaster had happened only once, in the thirties, and that was

before loans were federally secured. The buyers and sellers accounted

for the bonds as if they were as reliable as cash, because as long as

employment was robust?and it is?they thought they would be fine.

But now all hell's broken loose on Wall Street because of those

mismarks. This spring, as many homeowners stopped paying, the mortgage

bonds?for the first time?starting losing value. Hundreds of billions in

bonds that were thought to be worth more or less the price they were

sold at, it turns out, are worthless.

That's triggered a chain reaction: Brokers like JPMorgan, Goldman Sachs,

and Merrill Lynch that lent money to the firms that bought the bogus

loans?most famously, Bear Stearns?basically foreclosed on those firms to

get their cash back. But the firms, which are always running full tilt,

didn't have the money to pay up. Bear, at the direction of the now-fired

former co-president Warren Spector, let one fund just go down the drain.

But Spector thought the other was still worth a great deal, so he put up

$1.3 billion to pay back what the fund owed to the lenders and take

direct control of the mortgage bonds. Spector, maybe one of the best

minds in the bond business, genuinely believed that these

mortgage-

backed bonds still had substantial value. If someone as savvy as Spector

thought these bonds were still good when they were actually worthless,

that tells you that thousands of other managers are simply dreaming if

they think their portfolios are worth anything near what they claim

they're worth. In other words, we're looking at the start, not the end,

of the lending meltdown.

Now these funds, which were supposed to be brimming with cash?the

"liquidity"

you hear about all of the time?turn out to have not much at all, and

there are virtually no buyers anywhere for these mortgage-backed bonds,

because who knows if the mortgages that are in them are worth anything?

We only know that each day they are worth less than the day before,

because every week, thousands of borrowers are being foreclosed.

Here's another layer: The panicked managers of these firms were supposed

to be the buyers for all of the high-yielding corporate bonds being

issued to pay for the private-equity deals of Cerberus, KKR, Blackstone,

and other private-equity firms. They were supposed to lap up the paper

for all of the leveraged deals that are in the hopper for

underperforming companies like Tribune Corporation and Chrysler. The

Goldmans and JPMorgans had already promised the money to the Blackstones

and KKRs. They are on the hook?"hung," to use the grisly vernacular?but

they can't sell the bonds to their usual pension-, hedge-, and

mutual-fund clients because those clients don't have anywhere near the

money they thought they had and are facing redemptions from furious

investors. Now, pretty much every large financial institution in the

country is caught in a web it can't get out of. Bogus mortgage paper is

infecting the system, and no one has a cure.

Which brings us back to your money and why you're losing it. Unless you

keep your money in cash or Treasuries or CDs or the First National Bank

of Sealy, there's a pretty good chance that you're in a fund or funds

that are mismarked and worth less than they and you think. If you own a

home, you're in the financial crosshairs, too. It's not just that the

lending crisis is causing interest rates to rise, jacking up your

monthly nut if you have an ARM. It's that the value of your home is

endangered because of the hit Wall Street?the industry, if not the stock

market?is set to take.

In the past half-dozen years, the major brokerages in New York added

hundreds of thousands of jobs in three areas: mortgage-bond sales and

trading, private equity, and prime brokerage (the management of hedge

funds' brokerage accounts).

Each has grown by leaps and bounds each year. Now all three are frozen.

There are no mortgages to package and sell and no clients who want them.

The private-equity deals are all hung. And the way I see it, the

hedge-fund business is liable to be cut in half by the chain of

mismarking and redemptions. I think that many of these firms have as

many as 30 percent more people than they need right now in these

departments, and all of them will be cashiered by the end of the year.

The lists are being drawn up; the HR people notified. Not too close to

the holidays, please! And for those who are left, sorry, no bonuses. The

money was all eaten up by severances. Unlike other times on Wall Street,

the jobs will dry up across the board, because so many firms have

beefed up the same divisions. This time, get laid off at Bear, no

walking across the street to Lehman. The departed will be cut off from

billions in disposable income that fuel the New York economy.

What can thaw this nuclear winter? What can cause these markets to

defrost fast enough to save the jobs, and home values, of the rich in

New York, if not the newly poor and evicted in Rancho Cucamonga? Spooked

by the news that major foreign banks are now getting hit by the lending

crunch, investors took stocks down sharply last week, prompting Fed

chairman Ben Bernanke to order up a quick injection of liquidity into

the system on Friday. I think the Fed will also cut interest rates

soon?certainly sooner than it otherwise would have. That said, this Fed

has been famously inflation-wary, and it may be reluctant to loosen

rates too much, lest it overheat the economy, especially since the Fed

seems to believe that the nonfinancial economy, the part not connected

with home building or lending, is thriving. Of the 30 stocks in the Dow

Jones Industrial Average, only two, Citigroup and JPMorgan, are directly

connected to this mess. If Bernanke's right, and the rest of the economy

is as solid as he seems to think it is, it's possible the lending crisis

could be contained to only those who work in and around the credit

business. But that's a big if. If the lending debacle keeps spreading,

or the rest of the economy heads south, the Fed may find itself too far

behind the curve to do much good.

Who else can unlock the jam? Maybe we get some help from overseas, a

Chinese buyer of a major brokerage, perhaps? A Middle Eastern purchase

of some of a big bank's equity?Washington Mutual, maybe??wouldn't hurt.

That's what saved Citigroup in 1990. Perhaps Warren Buffett can come in

and buy a Bear Stearns; hey, he saved Salomon in a different decade.

What we need is some deep, untorn pockets to step up and buy some of the

good paper that is being thrown away with the bad, so the trading desks

can catch their breath and stabilize themselves.

Giant losses would still happen, but perhaps not institution-threatening

ones.

In other times, you might expect a president or a Treasury secretary to

get involved, perhaps to pressure Fannie Mae, the organization set up in

the thirties to issue emergency loans to alleviate just the kind of

homeowning credit squeeze that we have right now, to lend a hand. But

this administration seems to be either totally clueless or totally

heartless, or both, and doesn't want to goad Fannie Mae into helping.

Maybe they hate that quasi-governmental institution set up by

bleeding-heart Democrats to help struggling home buyers of a different,

more liberal and compassionate, era. Or maybe they just think that

anything short of an FDR-era Agricultural Adjustment Act for homes,

where we bulldoze whole housing projects instead of cornfields to get

price stability, just won't work.

I fear that the pain and contractions in the housing and credit markets

could cause as many as 7 million homeowners who bought houses in the

past few years to flee or be tossed from their dwellings, even if the

rest of the stock market thrives. It's why I went off the reservation

and screamed about this problem on television the other day (my latest

unhinged rant). I see what could go wrong. I see how the forgotten man

gets forgotten, and I feel helpless because I don't see anyone doing a

whole hell of a lot about it.

Thousands of miles from where the walls began tumbling down, New York,

the town where the architects of card houses live, will soon feel the

full force of the storm. So much of our economy depends on these

financial builders and their minions who buy and sell the products that

the pain may actually end up being felt worse here than in the

epicenters of the problem. You just don't know it or feel it yet. It's

all happened too fast, in just a few weeks of another sweltering summer,

with the worst, much worse, yet to come. Which is why I bet that in the

time it took for you to read this article, the Tom Joad effect just took

another few bucks out of your pocket. Get ready, many more dollars will

soon vanish before you discover you've been robbed.

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Get ready, many more dollars will

soon vanish before you discover you've been robbed.

....by the actions of people like Cramer!

Its always somebody else's fault isn't it, then when the shit hits the fan its somebody else's responsibility to help people like him out of the mess. Lying scum.

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....by the actions of people like Cramer!

Its always somebody else's fault isn't it, then when the shit hits the fan its somebody else's responsibility to help people like him out of the mess. Lying scum.

Yup. It would appear that it's capitalism red in tooth and claw for the poor man and socialism in the form of state intervention for the rich man. As someone else on here said: its all capatilism on the way up and state intervention on the way down.

Let them hang.

Edit to add: but he's right about the Grapes of Wrath. Right now would be the time for everyone on here to read this book if they haven't already done so. A lesson in humility and humanity if ever one was needed.

Edited by sossij

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Cramer is one of those who needs to go to the wall. He's playing the bear preacher now, but he was up to his neck in it until he sniffed something dodgy

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Cramer is one of those who needs to go to the wall. He's playing the bear preacher now, but he was up to his neck in it until he sniffed something dodgy

wasn't that jim crammer?

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I think he is really saying:

I am losing money, my friends are losing money and their jobs, (bloody)

and they're going to try and touch me for a loan (bloodier)

Soon, I will have no money and no friends.

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