Dark Clouds on the Financial Horizon
Subprime mortgage disaster may cost $460 billion: four times early estimates.
by Charles Coughlin
A recent Bloomberg news article reports “Wall Street banks, brokerages and hedge funds may report $460 billion in credit losses from the collapse of the subprime mortgage market, or almost four times the amount already disclosed, according to Goldman Sachs Group Inc. Profits will continue to wane, other analysts said. ‘There is light at the end of the tunnel, but it is still rather dim,’ (according to) Goldman analysts.” Or maybe the dim light in the tunnel is an oncoming train.
Countrywide, the nation’s largest mortgage lender has collapsed. Somehow, Bank of America was persuaded into buying up Countrywide even though many people wondered why they would pay anything for a company headed for bankruptcy with a ton of debt. It seems as though the Bush administration or the Fed must have pressured Bank of America into “a shotgun marriage” to avoid a total bankruptcy of Countrywide, which might tend to panic people.
Will the Countrywide acquisition eventually destroy Bank of America? The Bloomberg article notes “Bank of America Corp., the second-biggest U.S. bank by assets, was downgraded to `sell’ from `neutral’ at Merrill Lynch. The company, based in Charlotte, North Carolina, also had its earnings-per-share estimate lowered to $3.30 from $3.50 in 2008 and to $4.00 from $4.40 in 2009, analysts including New York-based Edward Najarian wrote in a note to clients today.”
One interesting thing about modern American corporations is that “No bad idea goes uncopied.” Lending $700,000 to someone, who wouldn’t qualify for a used car loan, would seem like complete insanity to normal people, but not to 90 percent of the mortgage industry and the banks, who were backing these loans, as well as investment companies like Bear-Stearns, which dove into these investments so deeply that Bear-Stearns went belly up the other week.
I suppose the sub-prime loans might have looked feasible the first few months as millions of Americans paid their initial mortgage payments while they were still at the “teaser” interest rate. Once the interest rate started to climb a little (or the subprime lender started using crack again), the subprime mortgages started to fail in bigger and bigger and bigger numbers.
Unfortunately for the mortgage industry, there was that two year period of insanity when “subprime” lending seemed like some untapped source of steady revenue that would soon become an incredible goldmine. Much like the story “The Emperor’s New Clothes,” it seems like almost every mortgage company was blind to reality, and the voices of sanity were too few.
Many mortgage companies are now headed for certain failure. They in turn will cause the failure of banks and investment companies. Those failures will spread up the food chain and start knocking over financial dominoes, which nobody thought would fall. We are in for at least a major recession and most likely a Great Depression. It would be a good idea to do everything you can to make yourself resistant to a stock market collapse and major economic downturn. Pay off your house –while you’ve still got a job. Don’t pile up any new debt. Don’t buy a new car. Figure out how you can keep feeding yourself if your job suddenly disappears.