This is what happens when the Invisible Hand raises its middle finger:"NEW YORK — Just four days after Bear Stearns Chief Executive Alan Schwartz assured Wall Street his company was not in trouble, he was forced Sunday to sell the investment bank to rival JPMorgan Chase for a bargain-basement price of $2 a share, or $236.2 million.The stunning last-minute sale was a move to avert a Bear Stearns bankruptcy and a spreading crisis of confidence in the global financial system sparked by the collapse of the subprime mortgage market."
And what's responsible for the insane subprime mortgage market? A deregulated banking industry: where Stupid meets Greedy, they get married and have a big family (that they subsequently can't afford to feed).
"In the past decade, as regulators discarded rules, shady mortgage banking companies, financed by the bluest-chip outfits on Wall Street, calculated that they could make a lot of money offering bait-and-switch mortgages to poor credit risks. Default and foreclosure rates would be greater, but higher profits would more than compensate for the risks.
So the subprime mortgage industry, enabled by the big banks, invented amazing gimmicks. These included not just variable-rate mortgages, but mortgages that were initially interest only, mortgages with introductory teaser rates, mortgages with no down payment. No income verification required! No credit check! Subprime operators targeted people with horrific credit histories and families desperate for housing who could not afford the debt they were taking on. Last year, 60 percent of subprime loans required no meaningful documentation.
Then came the morning-after: As higher payments kicked in, people couldn't meet them. Defaults skyrocketed, to an estimated 13 percent of all such loans. At least 25 subprime lenders have gone out of business. The big dogs on Wall Street, who had invested in the subprime operators, took a big hit, too."
It boggles the mind that anyone could ever have thought subprime mortgages would be anything but a complete disaster, with their inevitably unaffordable payments. It might be wise to buy more gold -- and it topped $1,000/ounce last week, so I'm not the only one thinking that way.
|