Thursday, December 6, 2007

Money and Banking - Subprime Crisis

Thanks to a good friend, I was able to sit in on a special guest lecturer, Kent Vickery from Carrington Capital, discussing the reasons, importance, causes, and predictions of the recent subprime situation. In Alex Gould's Econ 111: Money and Banking Course.

To preface the lecture - Alex discussed how 1. you don't want to be in a subprime mortgage - so keep the FICO score above 650 (a score between 720-850=99% chance to pay back) and 2. the psychological impact of the herd mentality. (They also compared the VC community to lemmings...another topic :) )

*for scale - in today's terms - the S&L Crisis would be $800B of losses

Kent's Points of Subprime:
1. Subprime Crisis is Nasty - $400 Bil of estimated losses
2. $300 Bil losses in US markets already
3. Ripple effect - A. US: property meltdown - 44.5M households will lose approximately $223Bil in wealth over 2008 and 2009
B. Globally - technical default after subprime resets
4. Disgruntled investors will be leading in litigation's to Investment Banks
5. History and How - went through 2/28 arm loans and just with a house of $675k house value and a loan of $417k, the difference in payments over 3 years between a conforming vs. a non-subprime borrower is $59,000 after taxes! At resets, price jump is too high and people cannot make their payments. "When things get tight, the BEAST must eat."
6. "Shadow Banking Bomb" CEO of PIMCO, anatomy of subprime CDO. People's ability to refinance/repay increases as their equity and value increases.
7. GSAMP Slide - Deutsche Bank Trust Reports: 12 Tranches, 10 investment grade
7/10 downgraded to junk, 4 have been wiped out. Cramer video - "no idea how bad it is", Idea: let market wash itself out, but election year so not politically possible. Goldman Sachs may have shorted the market when they saw the tranches slump.
8. Ripple turns into a tidal wave - like Enron crisis - or fall of LTCM

In banking "devil is in the details,"
Interesting idea from Ben Stein - investment banks (Goldman) center point for class-action lawsuit. Necessary information for litigation: EMAIL TRAFFIC: b/t Goldman and Deutsche Bank, outside underwriters, and credit agencies. They had default information and were still selling CDOs - so they made money on the shorts...shady.

Alex ended the final class with four points:
1. Cherish your relationships
2. Options are valuable
3. Trust your gut
4. Go out and get it

The worst thing that could happen to you; too rich, too beautiful, and peak too soon.

He then ended with a great speech. Anna Quindlen's commencement address to Villanova University, Friday 23 June 2000.

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