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Spring Cleaning For Free Market

Andrew Jeffery Mar 18, 2008 8:35 am


		Most offensive predatory lenders get theirs.

In the aftermath of the Bear Stearns (BSC) meltdown, it's healthy to see firms that bilked the system paying for their mortgage sins.

Despite government attempts to preserve existing rot in the financial system, the market is successfully punishing the worst offenders. Few, if any, will survive. At some point, the list will be long enough for a legitimate recovery to begin.

Of all the Wall Street firms that underwrote mortgage-backed securities, Bear Stearns was the most cavalier. It led the market in poorly underwritten Alt-A and subprime loans and bought the riskiest Option ARMs, 100% loan to value and stated income loans with little or no due diligence. Its servicing arm, EMC Mortgage, is one of the most unscrupulous in the business. Result: Collapse, takeover by JP Morgan (JPM).

Countrywide (CFC) automated to a point where controlling risk was impossible. The industry followed suit. The biggest independent mortgage lender in the country, its policies and practices became industry standard, including deceptive and predatory lending practices. Borrowed short, lent long, blew up. Result: Collapse, takeover by Bank of America (BAC).

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Subprime lending used to be a niche corner of the lending market providing valuable banking services to the underserved. Easy money coupled with greed on the part of both borrowers and investors drove New Century, American Home, Ownit and hundreds of other subprime lenders to issue loans that could never be repaid. There are effectively no more subprime lenders in America. Result: Bankrupt.

Washington Mutual (WM) and National City (NCC), through its First Franklin division, swapped responsible banking for reckless lending. Wamu is under investigation for appraisal fixing and Nat City has put itself on the auction block. Neither is likely to survive as an independent entity. Result: Takeover, bankruptcy, nationalization are all possible.

Merrill Lynch's (MER) risk controls appear to have been nearly nonexistent. The most aggressive underwriter of Collateral Debt Obligations (CDOs), Merrill has lost tens of billions, fired its CEO and been forced to raise capital to remain solvent. Ditto Citigroup (C). Result: Takeover or breakup likely.

The mortgage crisis and credit crunch will ultimately claim more victims. Indeed they must so the market can right itself. We can take heart that, so far, the worst offenders have been the hardest hit. It's unfortunate that individual investors and employees, who took no part in any wrongdoing, have to lose, too.


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Comments (8)

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John Lunam

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03-18-2008, 1:15 pm
Who investigates and what possible punishments await the perpetrators? Allowing them to simply walk away is not good enough. They have breached their fiduciary duty to all involved. Is there no agency that will call them onto the carpet for this? Read More

Andrew Jeffery

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03-18-2008, 2:06 pm
Richard and Carlos, You make an excellent point, that in the end, the actual people responsible for the predatory lending get off without much in the way of consequences. The point I was trying to make is that the system of Read More

Richard Monihan

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03-18-2008, 3:37 pm
I agree wholeheartedly that the system, in TOTALALITY, works. Capitalism is a great system of distribution, management and information diffusion. And I agree the fact that problems are washed out in one fell swoop, such as a recession, Read More

Richard Monihan

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03-18-2008, 3:37 pm
Yeah, that should be TOTALITY....not TOTALALITY. HEH. Read More

Andrew Jeffery

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03-18-2008, 3:43 pm
Honestly, I like totalality better. More emphasasis. It hit me today ... where is the SEC? Do they even exist anymore? The SEC came out last weekend defended Bear Stearns, is that really their role? That we have not seen imm Read More


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