Another one bites the dust!

If you enjoy a good train wreck, then watching the financial markets of the past few days should have given you plenty to watch. For those of you who have not kept a roll call then here is a brief summary, Lehman Brothers the large brokerage house has filed for Bankruptcy protection, Merrill Lynch brokerage house was bought out by Bank of America, and it was just in time or they might have suffered the same fate as Lehman. Now it seems that the straw that will break the camel’s back is what is currently happening to AIG ( American International Group). CNBC announced last night that they need to raise 75 BILLION by the end of Sept 16th to stave off bankruptcy, and now it seems like that may not happen.  

Now the question that you may be asking your self is how does all this matter to me, the individual investor. Well you think that because you did not have direct investment in AIG, Lehaman’s or Merrill that it does not effect you. Guess again, it probably does. These companies raised capital for investors and sold it off in the form of debt which many of our local financial institutions bought and packaged and sold back to us in the form of bond and other investments. Normally bonds are one of the safest places to put your hard earned cash and get a return.  However, bonds are basically debt instruments, where by we are given an income until the debt is paid. Now what do you think happens to your returns when they can not make their debt payments? 

If you are also wondering how this all relates to mortgages, well remember the sub prime crisis? AIG over valued their mortgage backed securities 1.7 to 2 times what Lehman did, and look what happened to them. In plain english, they bought ABCP ( asset backed commercial paper) or pools of mortgages and they issued securities on them ( claims of the principal and interest payments) and valued them higher than what they were actually worth. Now it needs to cover up the shortfall in the valuation and it can not seem to come up with the cash.  

This effects us all. If our banks and mortgage lenders can not sell their pools of mortgages to investors then we are left with limited options. Not everyone has squeaky clean credit, can prove their income and has loads of cash to make their purchase. Thankfully we still have lenders who have their finances in order. Call me so we can put them to work for you. 

Cheers,

Pat

p.s Maybe the example we should all follow is that of Warren Buffet, click here to get his biography. 

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