A funny thing seems to have happened on the way to the mortgage sales. The problem is not housing, people still like housing and real estate. The problem is that the mortgages don’t sell. The regions where housing prices are blowing out is were using the ARMs (adjustable rate mortgages) and IOs (Interest only), the market was turned into leveraged mortgages that are now blowing out. Look at California (see foreclosures.com) , where home sales have plunged by 30.1-percent. In the San Francisco Bay region, over 80-percent of new mortgages were of the ARM-IO exotic variety. That’s how the median home price in Calif. Hit $576.000. The share of houses on the market for three months or more has quadrupled from 6% to 22%. Massachusetts and Florida are about the same.

The news in the hedge fund industry is just as frightening. Amaranth hedge fund is totally brain dead, it is dead despite rumours of it being still alive. They are waving the corpse around and moving the arms by strings. It’s just so the regulators and the NY Fed, etc have time to unwind all the derivative positions. But, by trying to control the losses and spread out the losses, the bankers are just accelerating the crash. It sort of like me when I try to do everything else when I’m driving, instead of keeping my eye on the road!!!

Investigations, and deciding who gets to be caught holding the bag are continuing with the Hedge fund situation. The Pirates at Pirate Capital are under investigation, in that suburb of the Cayman Island, Norwalk, Connecticut. It seems that half of its staff has jumped ship. They lost four analysts and a money manager who quit or were fired, after returns fell at the $1.67-billion hedge funds. Well-known for buying large stakes in companies, and then looting them and throwing away the bones, Pirate is getting the treatment now from the SEC. The SEC is investigating it for not disclosing that it was selling stocks as they declined. Founder Thomas Hudson insists that he is not liquidating the firm. They could be as “brain-dead” as Amaranth, waiting to have their positions unwind so they can be quietly buried. Merger and Acquisitions are up to a record $2.68-trillion, or actually above that record from the first nine months of 2000. This just creates a huge amount of debt, which then has to be serviced one way or the other.

Meanwhile, the investigations are blooming of crooked hedge funds. As Amaranth blows out, the Pirates at the Pirate Capital are in trouble with the SEC for not disclosing 5% share ownership in various companies.

Also in trouble are the “activist” type of hedge fund, like Kirk Kekorian, for running their usual inside/outside op, trying to take over companies by thuggery of various sorts, ,,, even GM. The bubble, the real crash is coming to fruition. I don’t wan’t to be pessimistic, because I know the politicians and the people could solve these things, but I’m also realistic.

The Amaranth case ( the hedge fund that blew up) is important, but the coming sharp-down shifts in the already declining real estate bubble is a marker of a broader pattern. In fact there was a very big “Plunge Protection” meeting at the New York Federal Reserve Building about a week ago discussing this and related subjects.

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