Filed under: Market matters, Housing, Cramer on BloggingStocks, Recession
TheStreet.com’s Jim Cramer states this default should send shudders through each institution with a credit line.
Sure I was hoping it wouldn’t come to this, but right now we don’t even have enough money in the system to purchase one asset and sell another and take advantage of the differences.
I know you could argue that who cares, people shouldn’t be levering up like that anyway. All people should be able to do is borrow a tiny bit against their collateral and do nothing else.
But we’ve trillions of dollars invested in a system where we own one asset and we bet another asset against it, either as an arbitrage or a way to pick up extra interest. A lot of the mortgage REITs that you see going under, and have gone under, were companies that existed to exploit differences in residential mortgage prices. They took on some credit risk, meaning that the assets they purchased weren’t rock solid but had been as long as housing didn’t depreciate too much, but they had good steady businesses.
But those have now been obliterated by the decline in the value of the collateral.
Today with the default of Carlyle Mortgage, we are seeing that even companies that took on no credit risk, companies that make bets on rock solid bureau paper, can go under. Agency paper is about as good as it gets below treasuries and has implicit guarantees of the government. If that paper is worthless we are all worthless.
This is all really about the lack of capital to lend to these entities. The system doesn’t have it.
That’s what Carlyle is about. No one has the money to pay those who borrow on a big scale to make bets on financial assets.
I’ll be following this new development all day but it should send shudders through each single institution with a credit line in the country this day.
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Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com’s sites and serves as an adviser to the company’s CEO. At the time of publication, Cramer had no positions in stocks mentioned.
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