Major investment banks this week failed to find investors for billions of dollars in loans for the buyouts of Chrysler and the British firm Alliance Boots. Rather than having have made a “bridge loan” until they found investors, they must now carry these risky loans on their own books. This is mockingly known as a “pier loan”, as in “a long walk off a short pier.”
This is a direct result of the metastasizing subprime debacle. Credit is getting harder to get. Investors don’t want risky stuff anymore.
Countrywide Financial blew up Tuesday, announcing terrible earnings. The CEO said “Home price depreciation at levels not seen since the Great Depression,” and that prime mortgages, not just subprime are in trouble.
“Delinquencies on subprime loans widened to nearly 24% in the latest quarter, Countrywide Financial Corp., the nation’s largest mortgage lender, said Tuesday. But the shocker was that delinquencies on prime home equity loans more than doubled to 4.6% in the most recent quarter from 1.8% a year ago, giving the lie to the notion that the problems in the mortgage market could be confined just to the subprime sector, which caters to those with impaired credit. Apparently even well-qualified borrowers aren’t making their payments on time.”
Yes, it’s been quite a orgy of greed, deception and lies, now it’s all disintegrating. Unfortunately, We The People will be hurt by this seemingly distant and abstract financial implosion too.
Even those with plenty of money are saying the greedfest must end. From Bill Gross, Managing Director of PIMCO, they manage $687 billion in assets, mostly fixed income.
Now is the time, long overdue in fact, to admit that for the rich, for the mega-rich of this country, that enough is never enough, and it is therefore incumbent upon government to rectify todayâ€™s imbalances. “The way our society equalizes incomes” argues ex-American Airlines CEO Bob Crandall, “is through much higher taxes than we have today. There is no other way.” Well said, Bob. Enough said, Bob. Because enough, when it comes to the gilded 21st century rich, has clearly become too much.
Bill Gross continues, wondering how, since the ratings process for bonds is so obviously broken, that many are asking, what other ratings have they screwed up?
To be blunt, they seem to be thinking that if Moodyâ€™s and Standard & Poorâ€™s have done such a lousy job of rating subprime structures, how can the market have confidence that theyâ€™re not repeating the same structural, formulaic, mistake with CLOs and CDOs? That growing lack of confidence â€“ more so than the defaults of two Bear Stearns hedge funds and the threat of more to come â€“ has frozen future lending and backed up the market for high yield new issues such that it resembles a constipated owl: absolutely nothing is moving.
Between January and March, delinquencies for Alt-A rose by 17%, to 3.05% of loans, while subprime delinquencies rose by about 3.5%, to 14.83%… If Alt-A follows the path of subprime, there will be more forced sellers of U.S. houses.
– Ok, so what are we really talking about here with these so-called CDOs?
– CDOs were created in 1987 by bankers at Drexel Burnham Lambert.
– Wait a minute.
– Did you say Drexel Burnham Lambert?
– Isn’t that the same firm that was driven into bankruptcy in 1990 due to illegal trading in junk bonds driven by Drexel employee Michael Milken?
– And did you say they were created in 1987?
– The same year the market crashed?
– And wasn’t the 1980s known as the “Decade of Greed”?
– Yes, yes, yes and yes.
– So let’s see if we got this right.
– Today, in 2007, the market for securities that were created in the “Decade of Greed” by a firm that was only a short time later forced into bankruptcy due to illegal trading in high-risk bonds is grinding to a halt?
Capitalism is having one of its cyclical crises now. Boom-bust. It’s built into capitalism. When people like Bill Gross and Warren Buffet of the world say higher taxes on the wealthy are needed and the disparity in incomes must be leveled out, then you know there’s a war going on in the ruling class.
PS For those interest, CalculatedRisk has an excellent, detailed primer on the convoluted world of mortgage bonds and CDO’s.