Faisal Laljee

Subprime Lending Bust: Worst Crisis Since Enron?

Brian - I understand the general anger that individual investors face towards big business. In this case, as is always the case, there are some bad apples rotting the pie. New Century is the primary culprit. They wanted to keep making money even when the housing market started declining and rates increased. In doing so, they started offering ridiculous kinds of loans to people who could not afford it. Others like Novastar have a history of controversy.

But more importantly, it is also the fault of the US consumer. It takes two to tango and living in So Cal, I see people buy homes that they cannot afford, I see them spending left and right and the moment they have any equity, they borrow against that too. In other words, most of the sub-prime people never own their homes. They don't even own 1% of their home because they have borrowed every cent they can. In other words, banks and investors on Wall Street own these homes.

The key difference between this issue and Enrons and Worldcoms of this world is that in this case, the consumer who kept over extending is just as much at fault as the banks that lend them the money.

At the same time, in So Cal, with the median housing price in the mid-500,000's - it is extremely tough for a middle-income family to make ends meet. The housing here is more expensive than most other states, yet average income is not as high. Taxes are the highest in the nation, yet education at the public school level is one of the worst in the country. Most of the mortgage companies are in So Cal. This includes Fremont General, Accredited Home Lenders, Countrywide and New Century. And there is good reason for that - they are close to the action so they know how bad people have it here. I don't know much about other states, but I strongly believe that home values in So Cal are going to keep declining over the next 2 years. Those calling for a bottom need to look at the correlation between prices here and in the rest of the country. While its more volatile here, the overall trend across the country is dictated by California, Florida and a couple of other key states.

Sorry for the long response. As you can see, the consumer can be blamed for much of this on one hand, but I can understand their longing for the American Dream to drive them to borrow so much too.

I will try to write another post outlining what I think law makers can do to prevent this. Perhaps lenders should not be public companies looking to satisfy investors rather than engage in fair lending practices ... I don't know the answer yet but I will be thinking about it.

Subprime Lending Bust: Worst Crisis Since Enron?

Lehman Brothers and Bear Sterns have the largest exposure in terms of % of revenues. Other brokers are next with Merill Lynch, Goldman Sachs etc. Most of the banks you mentioned don't keep too much sub-prime on their books. They sell it to the brokers above. BAC and others mostly have Prime exposure.