INTEREST RATES JUMP, WHAT'S GOING ON NOW???? "MARGIN CALL" CRISIS WHAT IS THAT????

Well we experienced the "Sub-Prime" crash last March and what I referred to as "Sub-Prime II" that I now know as "Alt-A" crash, last August. Each caused a liquidity crisis. Which simply meant, "due to market fears us banks are holding onto our money." Each caused interest rates to go up and for the pool of different available loans to borrowers to shrink. And Shrink dramatically. It also caused banks to make it more difficult to qualify for a mortgage in today's market. Together, this caused home sales to crash!

Last week we experienced a different issue. Now it's the "Margin Call" crisis, still affecting liquidity. This time it did not cause a crash, but it did cause interest rates to jump nearly .5% last week.

Prior to last week I had no idea who Thornburg Mortgage was and had very limited exposure to Carlyle Capital Group. But they caused the rate jump. Mainly because their bonds dropped in value and triggered a Margin Call. OK, I thought a margin call was when you bought stocks on margin and the stocks dropped to a certain level that required you to deposit more money or sell the stock. This margin call is different... and in a way the same.

These financial institutions or "investors" were buying mortgage backed securities and then reselling them to other investors. However, the way it worked in their contracts was that should securities drop to a certain value, they had to buy them back. That was the Margin Call. If they, Thornburg or Carlyle, were unable to buy them back then the investors could sell them on the open market to raise the capital.

Due to the uncertainty in the value of these mortgage backed securities, other buyers are not willing to pay much for them. When this Margin Call occurred it flooded the market with questionable securities and dropped prices for all of them. Anytime you flood the market with a product it drives prices down, just like our housing market today.