Corporate & Securities Law

WALL STREET OWES SOME HONEST ANSWERS ABOUT THE SUBPRIME MELTDOWN

A FEW (AMONG MANY) QUESTIONS - and hypothetical answers) - THAT SURE SEEM RELEVANT...

Some answers seem so obvious that we wonder if anyone ever bothered to ask the right questions.

Q:  Aren't decisions to predicate the success or failure of trillion dollar securities and home loan markets on the reliability (or unreliability) of timely mortgage payments from bad-credit, subprime borrowers with established track records of already failing to pay bills and/or meet other financial obligations pretty similar (in terms of stupidity) to hiring a diamond thief to guard a jewelry store?  

A.  Yes.  True.  At least it sure seems that way to us.

In the two scenarios, the following outcomes seem very likely.  In no particular order, we would predict: 1) The jewelry store will soon be missing some valuable inventory, and 2) many individuals with poor credit eventually start missing mortgage payments. 

Q:  If subprime borrowers began to default on their mortgages in big numbers, for whatever reason - whether it was 2006, 2007 or 2010, investors would lose billions - maybe even trillions of dollars, wouldn't they?

A:  Ummm, yup.  

Q:  And, historically speaking (we will put common sense aside for a moment), there was no chance that that interest rates would permanently stay unfathomably low, or that home equity would continue to grow at the mind-boggling pace that made the subprime securities industry viable in the first place.  

A:  Historically speaking, it was highly unlikely that the subprime securities market would work in the long run.  That's true.  But it sure paid well for a while...

By Brett Sherman

The Sherman Law Firm