Last week was a tough one for the markets. Oil rose over US$88 and the Dow got clobbered. It fell 366 points on Friday. The euro rose to almost US$1.43.
The Boston Globe gives us a quick update on the housing picture:
“‘You can see that it’s a crisis,’ said John L. O’Brien, registrar of deeds for southern Essex County, based in Salem [Massachusetts]. ‘It’s starting to take on a life of its own.’”
Foreclosures in the yankee state are running three times last year’s level. And losses are working their way up the socio-economic ladder. Goldman Sachs’ (NYSE:GS) Trust 2006-S3 is a sophisticated investment instrument containing 8,274 mortgages. One out of every six of those mortgages is in default – only 18 months after the thing was put together. When that many people stop paying, it wipes out the entire capital value of the derivative. And since speculators usually take leveraged positions, the losses can go much further.
We don’t know whose mortgage is going unpaid…or who invested in the trust…but according to former colleague Adrian Ash, after Goldman created the derivative and sold it to its customers, it then sold its own monster creation short in order to protect itself.
Goldman is a smart operator. The typical fellow has no obvious way to protect himself.