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• Friday, August 17, 2007 05:15 AM

  Investing and Speculation

  First of all, investing and betting are not the same. Risk is a component of both, but whereas speculating implies a simple end goal--that the purchased security will rise in value--investing implies that regardless of the outcome, the investor will own something tangible. Also, with an investment the invested money will be used for some purpose by the recipient whether it be an acquisition, another investment, or a loan origination. That's why betting on a football game is not the same as investing in a football team.

  The writer has done a lot research but misses on many of the important nuances of structured finance. First, in the way he describes a derivative, a mortgage loan would itself be a derivative. It's not. It's debt. Debt is used to finance an asset. A house is an asset. A pool of loans is an asset. A pool of mortgage backed securities is an asset. You can finance these assets by using debt. Also, a mortgage backed security is not referred to as a CDO.

  Everybody is so quick to blame Wall Street for all of the country's financial ills. I would have to agree that greed is the main factor in this bubble. It's greed by all parties. Structured Finance itself is nothing so magical. It does not create value. It's just a way to finance assets. It's when people stop worrying about the risk...that someone will default or can't make a payment, that it runs amok. This goes for all credit markets.

  —bladdy kirsh Read bladdy kirsh's other letters
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