For years, we’ve become accustomed to hearing how no one could have seen the unfolding subprime crisis… not even, according to Warren Buffett, the credit rating agencies.
The very companies that paid millions to do efficient research could not foresee a problem of this magnitude?
What is Buffett thinking?
This is the guy that once stood up for the little guy, defending him from corporate madness.
And now he’s defending credit rating agencies — some of the very companies that took us to the edge of financial ruin, all while holding stock?
Why is he now catering to the corporate elitists that helped foster the subprime meltdown?
Why is he defending Goldman Sachs and its CEO Lloyd Blankfein — accused on fraud charges from the SEC and undergoing an alleged Justice Department investigation of criminal wrongdoing surrounding the structuring of ridiculous derivative contracts?
And why is he fighting derivative legislation after calling derivatives “financial weapons of mass destruction,” “unattractive,” and comparing them to hell and to Hurricane Katrina?
(In a note to investors, he once wrote: We are delighted that we hold the derivatives contracts that we do. To date we have significantly profited from the float they provide. We expect also to earn further investment income over the life of our contracts.)
It wreaks of hypocrisy.
But what really sucks is his support of credit rating agencies, which shouldn’t be blamed because they couldn’t have seen the subprime crisis unfolding.
And we all know that’s bull…
How could they not have seen this coming?
We did… because it was as clear as day.
As I reported back in 2007:
Subprime lenders could offer adjustable or teaser rates to those with bad credit. Loans like this made up 23% of the U.S. mortgage market in 2006 as compared to the 8% in 2001, according to Yahoo! News. And it’s a big problem, as one in five sub-prime mortgages are now ending in foreclosure, according to the Center for Responsible Lending as mentioned by Yahoo! News.
The Lending Market has not bottomed… nor has it priced in all negativity.
I’d love to sit here and jump on the bullish housing bandwagon that dominates Wall Street. Really, I would… But I’m not a fan of flushing my money down the toilet.
In reality, the housing market has not bottomed. Subprime lenders are doomed. You can continue to listen to the delusional madness pouring from the mouths of Street analysts and the mainstream press, or you can listen to the homebuilder CEOs and the subprime lenders that have gone belly up because of a weak housing market.
It’s your choice… but I’d go with the latter.
Even JP Morgan CEO James Dimon is bearish on the sector, saying, “Mortgages are the one area of sub-prime lending where we really see something taking place that looks like a recession… ”
That’s just an inkling of the tumultuous future for subprime lending.
MortgageDaily.com believes the sub-prime sector has another year of tough times ahead, a notion supported by Countrywide Financial: “We’ve got another eight, nine, 10, 12 months of headwinds. You’re seeing 40 or 50 (sub-prime companies) a day throughout the country going down in one form or another. I expect that to continue throughout the year.”
A recent Center for Responsible Housing report projects that “2.2 million borrowers will lose their homes and up to $164 billion of wealth in the process.”
Even MarketWatch.com reported: Signs of credit deterioration from the slowing U.S. housing market have already shown up in recent results of other banks as more borrowers fall behind. Foreclosures jumped 35% in December versus a year earlier, according to recent data from RealtyTrac. For the fifth straight month, more than 100,000 properties entered foreclosure because the owner couldn’t keep up with their loan payments, the firm noted.
Better yet (at least for those on the short side), there’s still plenty of negativity that hasn’t been priced in. We’re looking for further downside for six companies with connections to subprime lenders. Some have already fallen $3 to $4 in a week. Others, like NEW, fell $14+ in two days.
But one thing’s for certain — the worst is not over for subprime lenders.
And Buffett and the credit rating agencies missed it.
Let’s just hope that the fallible Mr. Buffett doesn’t miss the Option ARM disaster of 2010-2012. Let’s hope he’s smart enough to buy the very companies that’ll benefit from mounting foreclosures, as I am advising my readers to do.
Source: www.istockanalyst.com.
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