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Financial Planning > College Planning > Student Loan Debt

Bet The House

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Mamma Mia! You would truly have no ability to be shocked if you were not shocked by the enormous loss recorded by Citigroup for the 4th quarter and the even more enormous writedown of assets that caused it.

The nation’s largest bank said it lost $9.83 billion in the quarter, prompted by writing off bad loans in the subprime mortgage market to the tune of over $18 billion.

A couple of days later, another shoe of Brobdingnagian proportions dropped when Merrill Lynch reported a $10.3 billion loss for the quarter due to $11.5 billion in writedowns related to the subprime catastrophe.

This is getting to be reminiscent of the song ‘Ol’ Man River,’ wherein that body of water “just keeps rolling along.”

The Wall Street Journal reported on its front page on Jan. 17 some pretty staggering figures about the extent of subprime mortgages and how large a percentage of all residential loans they have constituted since 2001. It seems incredible, but in 2005 and 2006, subprime mortgages accounted for a bit over 20% of all residential loans, to the tune of $625 billion in 2005 and $600 billion in 2006.

It’s good to know the extent of the subprime loans in dollar terms. Now, if only somebody knew where all these loans are sitting and who is sitting on them!

Well, we know from Citi’s and Merrill’s results that they were, and probably still are, sitting on a ton of them. Part of the reason these two firms are getting hit so hard is due to guarantees they made or the fact that they dealt in some of these loans for themselves.

But the real problem is that this huge mass of subprime business was sliced and diced in so many ways that it makes one long for the relative simplicity of Lucy’s Vitameatavegamin. And once the slicing and dicing was done, the pieces were distributed far and wide to lots and lots of hungry buyers, including mutual funds, other banks, insurers and others of our most trusted financial institutions.

I am pained by all the agony that is going to result from foreclosures on homes of people who couldn’t afford them in the first place. Yes, I can hear some of you saying already that these subprimers should have known what they were doing and it’s their responsibility. But no one can tell me that subprime loans shoot to over 20% of all home mortgages without an intense push from mortgage companies and dollops of fraud thrown in for good measure.

Another thing that really bothers me about the subprime fiasco is that nobody–and I mean nobody–knew what they were doing. Yet that ignorance was unstoppable, spurred on as it was by sheer greed and the need to produce spectacular returns for Wall Street analysts, who can make or break companies and careers based on a quarter’s poor earnings.

Companies like Citi and Merrill and their executives literally bet their house–not to mention millions of other houses–on something they didn’t really understand and ultimately couldn’t control. It was a situation with no transparency whatsoever. The results now are huge losses, shredded trust and havoc in the housing market that has all but kicked the economy into a recession.

Considering how close to pure gambling this came, wouldn’t it just be simpler in the future to give Wall Street executives a boatload of money and send them off to the roulette or craps tables in Vegas?

At least then we’d have transparency and could decide if we wanted to go along for the ride.


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