Is the Subprime Fallout Over?
- Mar 20, 2008
Standard & Poor’s recently said it thinks the worst of the subprime securities-related writedowns are over.
It’s true, many banks and brokerage firms have already announced their year-end results for 2007. But are we really out of the woods?
S&P doesn’t think so.
According to an article in BusinessWeek, large banks and investment banks in Europe and North America have so far declared $110 billion in writedowns of collateralized debt obligations (CDOs) of subprime asset-backed securities (ABS). S&P suggests insurers and banks in the Gulf region and Asia will add $40 billion to that amount.
Past, Present–and Future?
The future of subprime lending looks more positive–lenders are being more careful about issuing loans to subprime lenders; that’s a big change from a year ago.
But many aren’t yet through with subprime lending’s past. ABC News reported that the FBI is currently investigating 17 companies in relation to the subprime collapse for mortgage lending practices. That’s an increase from January, when it was reported 14 mortgage lenders were under investigation.
So it would appear we’re not all quite convinced the subprime collapse is over and done with–or that we’re totally safe from something similar happening again.
Plus some companies still appear to be feeling the subprime effect, such as Morgan Stanley, which this week reported a lower fiscal first-quarter net income than last year–$1.56 billion, or $1.45 a share, compared with $2.67 billion, or $2.51 in the year-earlier period. Net revenue fell 17 percent to $8.32 billion.
It’s unlikely Morgan Stanley would agree that its industry was free and clear of future subprime issues; but its quarterly data did provide some hope: The company’s first-quarter earnings dropped less than had been estimated because record equity sales and trading offset its subprime writedowns, according to the Chicago Tribune.
Home, Sweet, Hard-to-Afford Home
But the biggest argument for not declaring the subprime mess as over involves–surprise–the ongoing housing slump.
As home prices continue to drop, some economists feel it’s hard to say that the subprime situation is over when we can’t really say the same about the housing decline.
“Looking back on this, it will be difficult to say if the worst part of it is the real estate crisis, or whether it’s that effect in the credit markets," Charles Geisst, a Manhattan College finance professor who has written several books about Wall Street’s history, told Fox Business. "It’s natural to ask where a bottom is in the real estate bit, but it’s fruitless."
That’s because in financial markets, one bad day will "clear the smoke," according to Geisst, whereas housing markets just don’t work that way.
“This is the problem," says Geisst. "People are looking for a bottom that can’t actually come. People always look to an end for a crisis, but we are stuck in this for 2008.”
It probably doesn’t help that while financial results come quarterly, housing reports from the National Association of Realtors, the Mortgage Bankers Association, the Commerce Department and other institutions are released more frequently–in some cases, monthly.
Those watching the housing market get a constant reminder of how bad things are; in the financial market, you at least have a couple of months off in between dour announcements.
But if we’re not looking for one bad day to mark the bottom of the housing slump, what are we looking for? A slightly better month? A two-month consecutive rise in home sales? A certain percentage drop in the housing inventory?
It’s hard to say–but one thing is certain: We’re looking. What do you think would signify the end of the housing slump? What signs are you watching for? Tell us what you think.