Bankers: Holding mortgage debt indirectly can kill you

How is so much money made on Wall Street? If you're guessing that a most use a "buy and hold" strategy ala Warren Buffett, you're way off. Just like with any stockbroker, the money is made by revolving stocks (i.e., buy and sell all the time) instead of holding them with a well-researched strategy and hoping for the best. Without transaction fees and commissions, many trading houses would be belly-up. Want $9.99 trades to encourage as many trades as possible in a given month? There are plenty of trading companies that would love to help you.

But the recent mortgage and subprime lending mess is a little different. Very simplistically put, instead of turning around bonds and other holding vehicles, companies like Merrill Lynch and Co., Inc. (NYSE: MER) and Citigroup, Inc. (NYSE: C) were buying up collateralized debt using bonds that were backed by subprime home loans. If those loans went into default, the risk to all that debt to these large financial companies is pretty scary. Err, wait...that is exactly what has happened, and as a result of this risky procedure, both of those finance houses are writing billions down in value and Merrill's O'Neal and Citigroup's Charles Prince have been sacked in the span of a week. Whoa!

Ignoring the fundamentals of finance (as in, risk management) is pretty easy for many of us, but when you lead some of the world's largest financial companies, it's gets a tad bit more thorny. If that risk balloons into a problem, you have a huge thorn in your side. This is precisely what happened to Merrill Lynch, Citigroup and many others reeling under the pressure of writing down assets backed by floppy loan foundations. When will the vision increase from a short-term one to a long-term one? On Wall Street, maybe never unless the market implodes upon itself.