Professor Elam

Accounting & Investing Info for San Antonio A & M

recent posts

about

Subprime Meltdown is Orderly

Relax, Goldman’s CFO says the subprime mortage meltdown is orderly.  Whew, I know I am relieved.  What does this mean really?  Now David Viniar, CFO of GS,  says he can’t predict the future, an amazing revelation from a firm that banks most of its profits from trading.  He allows that the mortgage business is a small but strategic part of their business.  Huh, what does that mean?

Take a look at the charts of GS, LEH, MS or better yet XBD index.  The stocks of all these concerns are falling out of bed.  I suspect what is really happening is that GS is attempting to get out while they still can, shift their bad loans to someone still so naive that they think there is little danger here.  The idea that a meltdown is ‘orderly’ is of course a total oxymoron.

Our point here is that what people do speaks louder than what they say. GS and others are in the business of packaging paper and as your text says, securtizing it, to others. Whether there is really any security in the deal is of course not their problem. And saying otherwise would be bad for business don’t you see.

Posted in

4 responses to “Subprime Meltdown is Orderly”

  1. Jordan McClary Avatar
    Jordan McClary

    Could the flames getting any bigger? I think they are going to. I have talked about this many times in class how the mortgage industry pushed people into loans they clearly could not afford. If there wasn’t an opportunity for loan officers, account execs, and underwirters to line their pockets with fees, this would not happen. They would make much wiser decisions on whats good for the company.
    Goldman Sachs is doing what every other lender out there does. There playing hot potato with the loans if you will. the question is, which moroon is going to drop the mortgage loan first? the object is to hold on for as long as you can to get every dime without getting burned and pass it to the next dummy. Everyone knows when you play with fire you will get burned and I think thats exactly whats about to happen. Talks about having an ethics class, the whole mortgage industry has become so greedy that their may need to be ethical laws set in place to protect any future fall outs. In this case it might be to late.

    Like

    Reply
  2. Jeff Burkholder Avatar
    Jeff Burkholder

    I have been keeping up with this too. My brother works for Centex Home Mortgage and a bunch a his friends work for Countrywide. I hear them talk all the time about the subprime meltdown. What most of these companies do is hire kids currently in college or fresh out of school (most who are broke)and pay them very little in base salary. The majority of their income comes from “bonusing” which brings in around $1,500-4,000 per two-weeks depending on the loans. If the loan officer doesnt meet his 4-6 loan quota, he only gets his low base salary. So there is huge incentive for these kids to push the loans through in almost any way possible in order for them to get paid. Most of these kids only go through 3 weeks of training. Almost every loan officer at his branch is younger tahn 25.

    Like

    Reply
  3. Dennis Elam Avatar
    Dennis Elam

    Well you can bet the training is not on how to compute the borrower’s debt equity ratio! You got this one right Jeff! the trouble with housing is that it is only in the interest of everyone to inflate the value of everything, so the homeowner gets saddled with a big note, orderly meltdown indeed.

    Like

    Reply
  4. Dennis Elam Avatar
    Dennis Elam

    As Kelly Clark pointed out in the morning class, this is a repeat of the S & L meltdown in the 1980s only this time it is the commercial and investment banks. And Jordan is quite apt with his hot potato analogy, no one wants to get burned. Today the meltdown in stock prices for banks continued.

    Like

    Reply

Leave a reply to Jeff Burkholder Cancel reply