The greedfest is ending

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 today’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 Moody’s and Standard & Poor’s have done such a lousy job of rating subprime structures, how can the market have confidence that they’re not repeating the same structural, formulaic, mistake with CLOs and CDOs? That growing lack of confidence – more so than the defaults of two Bear Stearns hedge funds and the threat of more to come – 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.

How bad is it getting out there?

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.

Minyanville gets it right

– 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.


  1. “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.”

    And Adam Smith would agree! As to the end of the greedfest, well, it’s the end of THIS greedfest. I’m sure there’s another one starting tomorrow in another sector. It is indeed cyclical, but not all sectorsa are times the same. Traditionally when real estate goes down, stocks go up– but stocks already ARE up. Bonds are an unlikely ride at this point, so perhaps it’ll be precious metals the rich will be dumping their money into next.

    BTW, have you noticed that from the 2000 tech bubble to the 2007 real estate crash, the rich (and the wise) got in early, then convinced everyone else that it was the next great investment, which of course drove the price skyrocketing. Then the rich and the wise got out with their profits, leaving the rest holding the bag when prices crashed.

    How did the general public get convinced to sink all their money into tech stocks/real estate? Media coverage telling them the investment was good, and advertising telling them they need to drink Chivas in a Mercedes. If you’re pointing fingers, you have to save one for our illustrious media/advertising industry, which serves its investors (the rich) well.

    One of the greatest problems our nation faces, probably greater than any real or invented terrorist threat, is the fact that we worship wealth. (Christian nation? Hardly.) I have a client who sold a business for over $100 million, and he’s desperately trying to make more (and failing) because $100 million doesn’t make him happy.

    Some of us have discovered through difficult experience that wealth will not fill the hole inside us. But we are in the minority. Until we as a nation turn from wealth to some more fulfilling goal (be it God, Dharma, humanism, or something else), the desperation of greed that drives these boom-bust ripoff cycles will continue.

    An Indian spiritual teacher once said something to the effect that if people thought of God as much as they thought of the world, who not become enlightened?

  2. The wealthy will get plenty burned on this subprime debacle. Especially if they’re leveraged. This will be bigger than both the dot com bubble and Enron, methinks.

    Why would anyone be unhappy with having “only” 100 million? Greed is not good.

  3. “Why would anyone be unhappy with having “only” 100 million?”

    It’s tough being stuck with a 120 foot yacht when your wealthier buddy has a 400 foot yacht!

    And that’s the point: if you value yourself by what you have, there can never be enough because you’re comparing yourself with others who have more and feeling inadequate. Only one person can be the richest. And I bet the Sultan of Brunei wants more now that he no longer is.

  4. Isn’t it interesting that only after Mozillo has been cashing in on his stock options in preparation for his retirement making millions, that he decides to outline the real problem with his #1 company. He set his lending benchmarks, and the rest followed to keep up. The more loans they wrote that were obviously not in the best interest of even the credit savy, the more money they made. I have no sympathy for him or his greedy company when the earnings shoe falls in the next few weeks. It goes to show you, our country is truely based on the wag the dog theory. It the rich say it should be so, it must in our best interest.

  5. I’m with Wendy. As a forensic auditor, practically all I see are the wealthy trying to get ever more. Why would someone with $100 million screw somebody over for a measly $1M? Don’t know, but it happens all the time. DJ is likely right that we’re a bunch of Mammonians.

Comments are closed.