Monday, March 19, 2007

Wall Street Deja Vu

I draw my readers attention to this article from the business section of the Saturday Globe and Mail. If you are regular here you will know I have said this exact thing.

Disturbingly, bankers, investors and regulators have seen this movie before. The boom-bust scenario now playing out the market for subprimes – loans to the riskiest borrowers – is remarkably similar to other recent episodes when the basic principles of sound lending were ignored or forgotten, until it was too late. There was the technology bubble of the late 1990s, as well as the trust and savings-and-loan crises of the 1980s.

Then, as now, financial institutions dramatically reined in credit after getting burned on bad loans. Indeed, the flight of lenders from the tech bubble of the late 1990s drove many of them toward the perceived stability of consumer credit – including home equity loans and mortgages.

How the industry got in this mess, again, is a disturbing tale of lending excess.

The simple explanation for why HCL and other lenders made seemingly uneconomic loans is because they could. A thriving aftermarket quickly turns subprime mortgages into bonds, flipping the revenue stream to investors around the world. Most banks no longer keep the loans in-house, so they don't care if homeowners can't keep up with payments. Instead, they make money on lucrative fees and push the risk up the line to an investment dealer such as Merrill Lynch & Co. Inc. or Goldman Sachs Group Inc., which then passes it on to hedge fund and pension fund investors.

American finance, the much touted Wall Street Bull market is living in a consumer driven bubble. There is no real boom, just a growth in credit, loans and party mow pay later consumption. Later comes sooner than the market expects.

What is scary is that folks pensions are tied up in these get rich quick schemes like variable and sub-prime mortgages. Which they weren't when the Junk Bonds and later the Savings and Loans meltdowns occurred.


China Burps Greenspan Farts Dow Hiccups

Housing Bubble



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1 comment:

Mike said...

Somewhere, Austrians are shaking their heads and chuckling....