Tuesday, March 25

Sub prime fiasco

Who’s to blame for the subprime fiasco.

Not the valuers who inflated their worth
Inflated a bubble that only could burst
Creating a dream for those who have less
Without the checks, to create less mess

Not politicians because the Feds been too lax
Not Banks who approved just the loan facts
Not Brokers who brought in the business
Paid in incentives with super commissions

Not borrowers, who don’t bother with fine print
Or the Wall Street Brokers just part of a link
Or traders who sold them on 4 more times
And were too busy to read between the lines

Or the rating agencies who gave them a tick
It must be okay, just houses and bricks
It must be okay, the world bought our stock
But no one expected those house prices could flop

It’s all happened before, its part of history
The percussions will continue, those guilty found out
Breathe sighs of relief, it’s the end of the route
It wasn’t an axis of evil’s monetary tree
Just old fashioned greed and naivety.


Anonymous said...

Wonderful! You captured the problem beautifully! (Which is to say - it isn't that simple!)

Seraphine said...

It's the Board of Directors and CEOs that decide to take the risk when they run a company. The problem is, they don't tell others they are taking this risk, such as their employees and their investors. That's ok in a private company, but it's not appropriate in a public company. Also, it's not appropriate in an institution that relies on public money such as deposit insurance. If it's a material fact that shareholders risk losing money or that a government might have to bail out or rescue the institution using public money, they YES, it is their duty to disclose the risk they are taking.

Zee said...

Excellent Sir!
Good conclusion. May I add that not only greed, but the whole philosophy of constant cancerous growth might have contributed?

lindsaylobe said...

Hi Arulba, Seraphine & Zee
Thank you for your thoughts.
Arulba -it is vey complex!
Seraphine- I agree with your comment, but unbelievable as it may sound however I think some directors did not understand the extent of the risk. Let me explain. It is always disappointing to observe what seems to be irresponsibility. Although you cannot eliminate risk, since that would entail you ceasing business, I think you can always be ethical and do your best to quantify any decisions in the best interests of all stakeholders and not expose the company to single sector or individual risks such that in the event of failure it’s likely or inevitable the whole company risks collapse.
The first point to make about the sub prime fiasco is those Directors connected to its outcome whether they are in public or private companies didn’t think they were involved in any particularly risky operations. Brokers, Banks, Mortgage Insurers and so on all thought the real estate boom would continue on for ever as in each long cycle, let us say a certain naivety takes hold which convinces usually sensible people it can have no end, as prices continue rising and default claims seem as though they will always remain low, fraud will always be absent and so on. If that real estate boom had continued no subprime fiasco would have eventuated.
Certainly once the honeymoon period expired on the individual loans it seems inevitable rising foreclosures would result from the inability of borrowers to pay the higher interest rates. But should the underlying real estate have substantially escalated as was expected a surplus after foreclosure would not have resulted in any loses, including any to original purchasers. Directors did not expect either the high rate of delinquency nor were some cognizant of the housing overvaluations and fraud when the debt was collaterised comically into A rated securities and recklessly re packaged to be sold on as new Securities with varying levels of risk shared with up to another 4 unrelated parties including the rest of the world (even Australian Municipal Councils responsible to ratepayers bought them) as its contagion spread. The tangled web was complicated and bound to collapse eventually, but artificial creativity, naivety and boom time idiocy ensured they were eagerly snapped up as ideal A rated investments.
How you view subsequent events will depend upon which lenses of the camera you are looking through.
Suffice to say such events afterwards always pose a moral dilemma and any action taken or not taken can have many intended or unintended consequences. Thus what I am proposing is the picture can be viewed from many different angles. What I attempted in my poem was not to be too specifically judgmental but rather to introduce all of the parties who contributed along the way to this fiasco; all of the weak links that prevented its risks becoming known or understood properly at any time which if fully detected and understood would have curtailed our current ultimate misery. You can prosecute the wrongdoers and legislative safeguards after the event, until the next one arrives, this time in a different form. Thanks for making your valid point -Let us know if you any further thoughts.
Zee -Most certainly – agreed let’s add it to greed.

susan said...

Very well put, Lindsay. A financial disaster metaphor in verse :-)

Seraphine said...

Sophisticated companies like Merrill Lynch, American Home Mortgage, Citigroup or Bear Stearns knew the risks they were taking. I don't buy the "nobody knew the risks" arguement. They thought they were nimble enough not to be left holding the bag. It's arrogance.
I don't mind that people or companies take risks. This is a capitalist society after all. What I think is wrong is these public companies don't adequately disclose the risks they are talking to their shareholders or their employees.
I love your poem. I hope you do more. :)

lindsaylobe said...

Hi Susan & Seraphine.

Thanks for your comments.
Seraphine – Thanks for coming back again with your follow up comment, it is a good point you make. I understand Spitzer’s successor has already subpoenaed Merrill Lynch and Bear Stearns, to try and find out what was going on and if the risks of such securities were known and not revealed to investors. I understand the FBI is also investigating 14 banks, trying to ascertain possible insider trading, fraud, or omissions. Doubtless there will be many to follow.

However no punishment, new accounting regulation, Auditing board or improved disclosure (such as Sarb Ox in 2002) alter the fact that companies will always represent a rather imperfect collection of fallible human beings. Not long ago was the Enron debacle , heralding in new laws to overcome perceived weaknesses, the tech dot com bubble and the last similar real estate bubble called the Savings and Loans crisis in the 1980’s -1990’s when about 1,000 of the 3800 odd registered Savings and loans Institutions went bust and were subsequently bailed out by the US government.

Students of history may well conclude there is no single thing that ever stands out and bites you on the leg and says “this is it”.

Best wishes

Anonymous said...

Hello, Lindsay.
I must say that I am cuitably impressed.
First of all, your grasp of the issues is itinerate, and secondly, your command of the language is superb.
I like it that you addressed each issue in point.


(of course, I came to know that there is much more of you when you published that photo of yourself onstage in costume-- there's much more of you below the surface...)

Seraphine said...

After history is written
the biting dogs are always
known, but in hindsight.
Yes, we are all fallible,
but we are not all barking
dogs. We are the mothers and
children of barking dogs.

susan said...

In my humble opinion Bear Stearns should have simply been allowed to fail and the CEO during this meltdown, James Cayne, who collected $26.5million should be prosecuted. Perhaps a lawsuit would provide compensation to the investors. Having the taxpayers bail these jerks out serves no purpose other than letting the others think they can keep on playing the same games forever. Corporate entities should be forced to practice Responsibility or face having their charters revoked.

lindsaylobe said...

Hi PT, Seraphine & Susan

Thanks for your thoughts.

PT ~I also never cease to be amazed as to the diversity and background of bloggers! What projects are you working on at the moment? Thanks for the feedback you enjoyed the poem.

I noticed Treasury Secretary Henry Paulson is likely to place before congress a proposal to create new regulatory bodies and agencies to better control both lending and the operations of the securities industry and in improving corporate conduct.

Executive Director remuneration packages have certainly reached mind numbing proportions.

I can recall when I first started out in industry the salaries of the Managing Directors of large public company and how that compared to the general workforce.

We used to think it was high even then but by today it seems almost inconceivable the extent of the real rise in remuneration packages which means the ratios are about 10 times the levels they were then.

Worse still if the company performs poorly and the MD is terminated very generous terminations payments usually apply.

Interestingly enough employees of Bear Stearns owned 30% of the stock and have seen its market value plummet from a high of around $170 year ago to $2 under the rescue package with JP Morgan, who has since raised the offer to $10.
Cayne himself stepped down as CEO in January this year, seen as overseeing a whole raft of problems and huge write downs, when the firm announced its first ever loss in 85 years in business, but Cayne continued in the role of non executive chairmen. It was reported he had worked at the company most of his life and served the last 15as CEO. The proceeds from the sale of his own shares were reported at $61.3 million, worth $450 million just a few months ago and much more a year previous.

Best wishes

Gary said...

Did you write this? It's terrific and I couldn't agree more with the sentiment.

While there are plenty of villans in the world to go around, it's false comfort to look for consipiracies and evil corporate men, hiding in boardrooms. It's human nature and our consciousness that needs to be re-structured, not the stock market or electoral system (well, not as much :)

lindsaylobe said...

Gary - Yes, my poem and thanks for your thoughts.

What's your view about collective consciousness in Canada and in the rest of the world at this time ?

Best wishes

Cart said...

Well done, I don't recall an economist poet since Adam Lindsay Gordon, oooops JK Galbraith I meant.
You continually impress me with your ability to describe the complexities with such ease, in verse or prose.