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Thursday, February 28, 2008


Alan White

Actually, investors do absorb losses, whether they are companies or individuals. Some are individuals, some are the shareholders of banks, and some are institutional investors, like university endowments. If a mortgage-backed security has a loss of principal, the investors lose money. If they are companies, they may succeed in raising prices to pass losses to their customers, but in most instances financial losses are borne in other ways, such as reducing dividends, drops in share price (in the case of a publicly traded company) or in the worst-case scenario, bankruptcy. The company's shareholders may bear the loss, in other cases it may be its lenders, or in some cases it may be employees who are laid off, or a company might compensate for losses in a variety of other ways. The original point about losses is that for mortgage investors, there will be losses, either from foreclosures or loan modifications. In many instances, the losses from foreclosing a depreciated home will be far greater than the losses from renegotiating mortgage terms, either by agreement or as a result of a bankruptcy rewrite (such as reducing the interest rate.)


Companies do not 'absorb' losses. They pass them on to their customers.

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