This is probably the most sensible an informative bit of commentary on the current market conditions (DOW -387):
I love how 90% of farkers don't understand exactly what the crisis is right now.
It's not the fact that the housing bubble "burst". People aren't jumping out of skyscrapers because their house value went down by 5%.
The vast majority of the problem is that the credit market for certain types of bonds has tightened up, to the point that it's almost not even trading at this point. To those that are newbies, the bond market is roughly 10x the size of the stock market in terms of dollar value. It is huge. Bonds get traded back and forth every day, and billions upon billions of dollars worth.
What happened is that mortgage-backed securities are farked up. During the housing boom, lenders would give mortgages to people, then they would package them up and then sell a whole shiatload of mortgages to things like pension funds, hedge funds, mutual funds, etc. The lenders like this because they reduce their risk, and the funds like it because it's a reliable source of income, at least mortgage-backed securities are. Well, it turns out that the lenders were selling the funds investment grade mortgages, when in fact they were more like junk bonds; the people who got these mortgages not only faked their income, but in reality could only afford these mortgages under the best of conditions. Now that short-term interest rates have spiked up, many people have defaulted on these loans. More importantly however, the price of the mortgage-backed securities drop because their price is in part related to how reliable they are as an investment.
Now, many hedge funds invest in MBSs on margin, which really screws them up, because all of a sudden they owe a huge amount of money on worthless securities. This is why 2 Bearn Sterns hedge funds got screwed over and a 3rd one is in question. It's like owning stock in a gold mining company with a certain reported amount of gold, and then finding out that there really is no gold. The price will plummet, and if you bought that stock on margin, you will get a margin call.
The same thing happened with the French hedge fund that this article is talking about. What is worse, however, is that if the markets aren't trading, you can't tell how much the stock is worth, so the French stopped trading the funds until it can get better clarity as to how much their fund is worth.
The submitter's headline is misleading because the govt isn't injecting $12 billion, it's $12 billion more than they usually inject. They are always buying and selling bonds to create liquidity. This is what they mean by the US or Euro governments injecting funds into the bond market. They are going around buying bonds to create an artifical market because regular traders aren't buying them anymore. They are buying these bonds to create liquidity, so that traders will have confidence they can buy and sell bonds again, and once the market recovers they will turn around and start selling them back to replenish their reserves.
This is the real danger here. This MBS contagion has spread throughout the world because every one around the world has invested in US MBSs. We have no idea how bad this contagion has spread, but if this MBS problem takes down funds around the world, and the credit market really tanks and there is a flight to quality, making things like MBS fall even further, it could literally evaporated trillions dollars of peoples investments around the world.
From poster tstoneman.