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Bring in the Bears!

I'm getting excited about the capital markets these days. I look forward to oil prices hitting new records and the Dow Jones Industrial Average dropping triple-digit points. The valuations are becoming increasingly attractive - especially the non-US financial institutions.

All of this is possible thanks to some smart investment bankers and incompetent ratings' agencies (like Moody's), risk managers and portfolio managers.

Why the investment bankers? Because they were able to "package" various sub-prime mortgages into a new type of investment and then sell it (usually to banks) for a profit. The people at ratings' agencies played their part by giving these new investments an "investment-grade" rating. It is now clear that they did not understand what they were rating. They figured the packaged investment was sufficiently diversified. I guess they did not understand the terms of the mortgage (i.e. low "teaser rates") nor the borrowers.

As the US homeowners started to default on their payments, the banks who bought these investments now have no idea what their investments are really worth - hence the write-downs. What were the people at "Risk Management" doing while these investments were being bought in the billions? Sleeping, of course! And last, but not least, the portfolio managers. How could they break one of the golden rules of investing - not to buy things you do not understand?

If this continues for a while more, I will be making some substantial long-term investments. I look forward to doing that.

Keep it up and bring in the bears (and sheep)!

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