Saturday, February 9, 2008

The Root Cause Of Sub-Prime Issue

Heard of these:

  • The famous tale of a janitor in a large corporation telling one of the senior staff at pantry that she just bought a house in anticipation of selling it at higher price soon; a tell tale sign of lack of thorough credit evaluation in US
  • You have numerous writings by shrewdest real estate investors to promote minimum- or zero-down concept to ride on of one of the longest waves of economic expansion in America since 1929, with the aim to generate serious wealth, only to be followed by (in majority) those half-baked real estate investors; this is a time-bomb
  • Smart financiers re-packaged what seem to be, on its own merits, a low grade financial papers, into somewhat an attractive instrument called CDOs, and sold it to refinance their portfolio for greater leverage power, has helped expose many global financial players to this genuis investment-marketing breakthrough; the results need no special mention here, if you do read financial news for the past 3 months

My take:

  • The root cause of sub-prime issue is really about reckless consumption or investment (if you like) with obvious lack of foresight and hard-driven by greed, to start with. It reminds me of 'theory of greater fool' ; that is to buy something hoping for another (greater) fool to buy at even higher price) and this will go on for some times until the axe falls. While some will learn from this lesson the hard way, the scary part is some will never learn or have a short memory.
  • If the consumers are reckless, what about the financiers who suppose to be smarter (indeed some were very smart to sell a rotten apple to fresh foods sellers) but along the way got themselves excessive exposed to credit risks? If there is anything to explain why smart institutional investors took up massive exposure in CDOs i guess it could all square down to being eager to display top performance in their portfolio with lucrative returns from CDOs-related. All large banks like Merill, Citi, UBS, to name a few, have all been trying to address the issue with massive write-offs but no one could be sure if the measure adopted has been adequate but one thing for sure is the act of write-off is like throwing good money into bad
  • Then you hear about crying-for-help calls to solicit for lowering of base and discount rates by Fed and for government and congress to approve rescue package to stimulate what seem to be high probable of risk of economic slowdown in US, and they got exactly that. While the effort will ease and possibly avoid the economy from sliding in recession, at least for now, it still left the root of the issue largely unsolved; that is on the 'behavioural' part of consumers who think that their reckless act is condone by the Fed and US administration, so MAY BE they should not be fearful to continue with such act again when the time is ripe for another quick quick profits.

So you judge whether the sub-prime issue has been adequately addressed by some of the recently announced measures?