The Titanic disaster reminds me of the current situation in the subprime mortgage debacle now going on.

When the first of the bad loans surfaced the “experts” and talking heads on TV were all of the opinion that this was a small amount of money when considered in the overall size of the market and would have no effect on the rest of the market. They did not remember the “iceberg effect”. Only 10% of an iceberg appears above the water. What may appear small is enough to tear a hole in a very large ship and sink it.

Now the subprime losses are leaking over into the prime market. And it is not stopping there. Suddenly the multibillion dollar merger and acquisition (M&A) deals are being splashed with very cold water. Some are being withdrawn and other being “reconsidered”.

There is a hole in the boat. It hasn’t sunk, but it is listing. The crew of the Wall Street Titanic thought they had special equipment on board that would plug any hole that might appear. It has all kinds of strange names – CMOs, CDOs, REMICs, MBSs, XYZs and Gosh Knows Whats - called derivatives. These were guaranteed to fix any problem.

None of the crew, in fact none of the folks at the ports, knew how many derivatives were on board. Those on shore in the brokers offices guessed anywhere from 200 to 800 billion might be on board all the ships at sea. Now they are not sure if these safety devices will or can keep the ships from sinking. So far so good.

The fellers (brokers) back on shore are having a problem selling or giving the derivatives away. They are not sure who owns what even though there is a paper trail. If only a few of the dominos fall it could sink many ships. When the LTCM (Long Term Capital Management) went under there was much less money at stake and it almost scuttled everyone, but that was another type of deal. This ship is floundering and is still floating

The smart sailors have been trying to sell their derivatives, but it seems there are few, if any, buyers. One buyer, Big Ben, has taken some of the paper at face value as he thinks it might be worth it in the long run. Other potential buyers (central banks) know he is creating the money to buy out of thin air. They might do the same thing.

Like the iceberg that only shows a tiny portion of what is truly there those on shore are nervously waiting to find out how much damage has been done and how big that “berg” really is.

Ask your governor how many bridges he is willing to cross?

Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know. Copyright 2006 All rights reserved.

Copyright 2007 Albert W. Thomas All rights reserved. Author of "IF IT DOESN'T GO UP, DON'T BUY IT!"