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Bagholders in Tears


This is just the beginning of what is to become a long trail of tears. Expect to hear more stories like this...


Just moments after posting Who's Holding The Bag? on my blog, someone sent me a link about bagholders in tears:

Dozens of South Florida senior citizens have lost millions of dollars of their savings because their brokers bet wrong on risky mortgage-backed securities after promising them a stable investment...

...(California firm) Brookstreet has said the money was lost in part because of too much securities trading on margin, or borrowed money. The value of the CMOs declined, Brookstreet said, as the so-called subprime mortgage market worsened. The firm that administers Brookstreet's accounts, National Financial Services, then demanded to be paid for the investments bought on margin...

Three Comments:

1) I do not take any pleasure in this, other than in being right.

2) I wouldn't have warned people about this danger for several years if I wanted it to happen.

3) If you think you know something that others don't, the best way to profit from it is to keep your mouth shut.

With that out of the way, even I am stunned by a $12 mln in margin call. I don't think I would wish that upon anyone. Why would any company let losses get that far away?

Of course, we all know the answer to that question: greed and fraud. Clearly these investments were not at all suitable for anyone, let alone someone with a clear goal of capital preservation.

Will it matter? Of course not. Sure, there will be lawsuits. Perhaps someone goes to jail over this. Perhaps. However, that will not restore a $12 mln margin call. Nor will it make right the woes of those senior citizens or anyone else in the same situation.

Note that Brookstreet executives could not be reached for comment. Add that to the growing list of those refusing to comment. At the top of the list are Bear Stearns (BSC) and Merrill Lynch (MER), both refusing to comment on recent happenings.

The sad thing is this is just the beginning of what is to become a long trail of tears. Expect to hear more stories like this. A lot more.

No positions in stocks mentioned.
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