Friday, March 14, 2008

A lesson in subprime lending & the epic fail of Bear Stearns...


So as everyone's now discovering, it appears that when you loan money at extravagant and upwardsly-mobile rates to individuals who have proven they're not so good with the "paying bills" thing (that is, "subprime" borrowers), it turns out they don't pay their bills.

Now this is a pain in the ass with cars and credit cards and shit. It turns out, it's a HUGE problem when people just stop paying for the houses they're living in. That's right: let's take nearly the riskiest group of borrowers and give them rates that adjust UPWARDS (while their income stays static) and hope they can continue to pay their bills.

This started to be a big problem especially when house prices started to tank after many refinanced in order to continue on and enjoy the equity they had built up.

Now, I'm all about letting the market handle itself. It's a bit of a meltdown, but the lenders have no one to blame but themselves. They had all the data available. They knew what they could wring out of these people and they pushed too far and appear shocked, SHOCKED, I say when the actuary tables didn't quite bear out.

So we're stuck with epic fails like Countrywide, Nothern Rock, Citigroup and today, Bear Stearns. The investment bank has had plenty of comeuppance since June of last year when they were forced to pledge a $3.2B bail-out loan to one of their funds heavily invested in collateralized debt obligations.

Because these bad boys are held on a mark-to-market basis, (which essentially means that they're only ever worth what you can get for them, not what you paid for them; as a side note, a fancy way to commit accounting fraud if there is not day-to-day market available to peg the price at) the funds turn out to have a hard time paying down the loans, since no one's buying the damn houses. Kind of an oversimplification, to say the least, but at the end of the day, Bear Stearns hit the panic button and got themselves another buy out from the Fed and JP Morgan Chase.

And the market ate it, slipping back under 12,000, to the pre-the-fed-will-inject-$200B-rejoice levels from the end of last week. Way to CTRL-Z the fuck out of that one, Bear Stearns. Bear indeed.

The Bear Stearns Companies Inc. (Public, NYSE:BSC) - Discuss BSC Find more results for BSC

-27.00 (-47.37%) HEY-O!
Mar 14 - Close

Oh, this is all by way of saying that the market slipped heartily and thus did my meager holdings. No moral of the story; I'm getting sick of hearing about subprime fails.

1 comment:

Anonymous said...

i would cut apple and google. check out fertilizers and basic minerals.