Quote of the day, March 10, 2009: Private equity company Blackstone Group LP CEO Stephen Schwarzman said that up to 45 percent of the world’s wealth has been destroyed by the global credit crisis.
“It’s not reassuring,” said Kenneth Scott, a professor of law and business at Stanford Law School and former general counsel of the Federal Savings and Loan Insurance Corp. “There are more losses to be realized, but the question is the extent to which they are already reflected in values that banks are recording on their books.” Scott said it is unclear whether Bank of America should have disclosed more, though “as long as you don’t say anything that’s incorrect,” it is often acceptable to wait on disclosing deterioration.
Normally if you or I buy more than we can pay for we wake up to the fact that we are broke. Not so with Citigroup. As taxpayers we gave Citigroup $20 billion in November 2007, and guaranteed $300 billion in loans on Citi’s books. You and I also gave Citigroup $25 billion from the Troubled Asset Relief Program – the TARP program. If you or I invested like that we would be broke. Citigroup cannot show where they helped a lot of homeowners, but did anger the industry when they agreed to let judges modify loans.
On July 19, 2007 Lehman Brothers rejected suggestions that they are exposed to subprime problems. Many companies made statements in the summer of 2007, in part because their shock and disbelief caused those companies to say just about anything. Remember Countrywide in July 2007? But we had a problem with Lehman Brothers rejection of exposure to subprime as soon as soon as they said it. Lehman Brothers always loved subprime and companies like Household International. How could they possibly NOT be exposed to subprime, as their 2007 statement suggested?
“Nobody had models for that,” said David E. Zimmer, then one of the executives at People’s Choice, a subprime lender based in Irvine. “Nobody had predicted people going into default in their first three mortgage payments.” Wake up Dave – it is called How to sell your house to the bank with a new loan – and the idea is to get refinanced while intentionally planning to never make a payment. No models for that? Back in 2001 through 2003 my wife and I bought foreclosures, often commenting on how fast some homes went into foreclosure. We joked about people who sold their house to the bank. If the neighborhood was going downhill just sell your house to the bank. White flight? If you can’t sell then do a cash-out refi to start your new life elsewhere, and never make a payment.