U.S. financial institutions have been hard hit by the subprime-mortgage mess. This summer, two Bear Stearns hedge funds that invested in subprime mortgage bonds went belly-up. Citigroup on Monday blamed problems with subprime bonds for charges it must take against earnings. Generally speaking, however, the financial complex has collectively weathered the credit storm rather well. Goldman Sachs last month reported a blowout quarter....
...Experienced tourists also know that to avoid trouble, you have to travel to exotic foreign markets in season. The same holds with investing, especially in a cyclical business like credit. During bubbles, foreigners and outsiders tend to be the last to enter the market—and thus the first to get hurt when the bubble pops.
Subprime bonds issued in 2002 and 2003 have performed quite well, all things considered. But those investors that started committing large sums of capital to the subprime market in 2005 and 2006 were like tourists who paid high-season prices to travel to the Caribbean in October: They checked in at very high rates just in time for a devastating storm.
Thursday, October 4, 2007