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The Derivatives Pressure Cooker and Mortgage Backed Securities

Last week, Prof. Robert Shiller told Reuters that he thinks another 25% drop in US home prices across the board is very possible, if not likely. Add up the 33% decline to date and a 25% fall from here and you're about at 50%. That would mean a loss in American "household wealth" of some $11 trillion. Here's saying that the US economy can't take that sort of plunge and hope to live to see another day in anywhere near its present or recent shape. And that's just the most visible part of the iceberg: an additional 25% drop would also tremendously increase the pressure on mortgage backed securities (MBS), and with them perhaps lots of other derivatives, to such an extent that the mark-to-fantasy US FASB 157 accounting non-standards may well become untenable. At some point people need to know, and demand to know, what the real value is of assets they hold, and assets held by companies and financial institutions, if only in order to determine the value of said institutions. So when Tyler Durden at Zero Hedge says that Ben Bernanke’s QE2 went almost exclusively to foreign banks, color me not surprised (even if I have some questions on Durden's assessments). The sellers and counterparties for the US MBS are largely American institutions, and they sold them all over the world. To China, to Japan, and to foreign banks and funds. In case of a default, a credit event, it's these American institutions that will have to pay up.

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