Bankers Gone Bonkers

David Dorst, chief investment strategist for Morgan Stanley’s Global Wealth Management group was quoted in the Arizona Republic as saying, “The financials are the bodyguards of the market.”

So, what happens when the money managers manage poorly, or not at all, and the bodyguards let down their guard? The answer is a crisis in the financial market and all signs indicate that we are clearly in one now. Only the full scope of the crisis has yet to be determined.

A lot of theories have been advanced as to how things in the credit market deteriorated to the present state. In one way or another, they all point to poor management and, as a result, heads are starting to roll in the decision-making places.

Much of today’s dilemma has been attributed to declining real estate values from over-building–a fairly regular event. One cannot help but wonder if these top people ever leave their ivory towers and see what is happening down on the ground. Driving around fast-growing areas like Phoenix, Las Vegas, and southern California you cannot escape noticing the enormous amount of residential development taking place. Any prudent manager would have to ask: Where are the people to come from to fill all those houses and apartments? A savvy money manager would also have noticed that, in fact, prospective homeowners were not the only buyers; rather, many were investors hoping to cash in on a quick rise in real estate values and with little or no money of their own invested. Where were the bodyguards when this assault upon our system of credit was being waged?

If the men at the top of our financial institutions were on the same mailing lists that I am on they would have been aware of the overzealous efforts to extend credit to consumers. Such activity should have been a warning sign to the bodyguards. For example, among many other offers of credit, I have received in the mail numerous offers from Citigroup to refinance a mortgage that I paid off years ago. Don’t they check their records or is the strategy just to market credit indiscriminately?

A few years ago several people I know left their regular jobs to hawk mortgages for lenders. As mortgage brokers, as they called themselves, they made easy money for a couple of years. Then the door slammed shut on most of that activity. Today, one is back selling cars, another is delivering pizza and the third is back waiting on tables at a local restaurant. All are waiting for the glory days to return.

The real victims of poor management of the credit markets are homeowners who find themselves owing more than their homes are worth. They are trapped, because if they try to sell their home they will have to come up with the $25,000 or $30,000 at closing. Few, if any, can afford that. Investors who bought such properties with little or no risk of their own assets are simply walking away from their mortgages leaving the lender to deal with the decline in value.