Note Course Bonus: The Root Of The Subprime Mess
Published: Tue, 06/10/08
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Hello again ,
What's the cause of the subprime "crisis"?
That's the subject of this brief Note Course Bonus Lesson.
Hope you learn from and enjoy it.
Cheers,
Bill Mencarow
www.PaperSourceOnline.com
www.cashflows.org
THE ROOT OF THE SUBPRIME MESS
Here's an idea: Let's loan money to people we know won't be able to
pay it back!
Stupid? Of course. You and I know that. But the biggest
financial companies in the world don't. Here's just part of the
tally so far:
* $1.9 billion in subprime losses at Bear Sterns
* $3 billion in subprime losses at Canadian Imperial Bank
of Commerce
* $3.4 billion in subprime losses at JP Morgan Chase
* $8 billion in subprime losses at Morgan Stanley.
* $10 billion in subprime losses at UBS.
* $11.5 billion in subprime losses at Merrill Lynch.
* $18.7 billion in subprime losses at Citigroup.
Altogether there is more than $1 trillion in subprime debt
outstanding, much of it worthless.
Screwups have consequences: So far the axe has fallen on Warren
Spector of Bear Stearns, Peter Wuffli of UBS, Stan O'Neal of
Merrill Lynch (pushed out with a $160 million golden
parachute), Chuck Prince of Citigroup, the largest bank in the U.S.
Yes, let's lend money to people who can't get it anywhere else,
charge them high interest rates, exorbitant fees, and put them on
ARMs. What a great plan!
And let's compound this strategy by buying these loans
from other fools, chop them up into mortgage hash, mix in enough
sweetener to get a decent rating and then sell them off to greater
fools. We can get big fees up front and then lay off the risk onto
the idiots who will buy them! Brilliant!! (Citigroup gave a
new definition to "greater fool" when it bought back $4.2 billion
of these loans.)
These guys convinced themselves they were doing a public service,
helping people buy houses by redistributing the risk from the
people who incurred it to people who had no idea it was there; the
financial equivalent of Mother Teresa. Except she never became a
multi-billionaire in the process.
Now the lenders want a taxpayer bail-out, and George Bush, who
never met a business welfare plan he didn't like, just might give
it to them.
(inspired by an article in www.dailyreckoning.com)
Read my favorite columnist, The Mogambo Guru:
http://www.dailyreckoning.com/Writers/MogamboGuru.html
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