The credit system has broken down. Banks have cooled on lending (maybe because they are not sure if the Obama administration will force a cram down in the future that would result in their loans being worth much less than they thought?). But the system also relies on hedge funds to purchase loans that banks make and package as securities. Hedge funds would stand ready to buy these loans from banks, releasing more money that could then be used to make additional loans. Hedge funds-often heavily leveraged-made billions over the years with these types of securities. They often rode a wave of lower interest rates that inflated the value of their holdings. It was relatively easy money (especially if you were sophisticated and large enough to borrow overseas in Japan where interest rates were miniscule).But they now face an unfavorable risk-reward situation. They have stepped back in the wake of recent losses. The easy money is gone. The solution that the Obama proposes? Subsidize hedge...(Read Full Post)