Sub-prime Casualties Who Should Have Known Better

January 06, 2008 03:05 PM
by findingDulcinea Staff
It is not just uninformed borrowers with poor credit who are suffering from the sub-prime crisis; the country’s financial giants have lost billions. How did Wall Street’s mavens come unstuck?

30-Second Summary

The International Herald Tribune estimated that U.S. investment banks and securities firms lost or wrote down over $66 billion in connection with the sub-prime collapse.

But actual losses may be far greater, and some analysts predict that the financial pain will continue well into 2008.

The financial stocks market was the worst performer in 2007 among the sectors featured on the Standard & Poor’s 500-stock index, falling 21 percent in share value. Individual companies fared even worse. Fannie Mae, Freddie Mac, Moody’s, Bear Stearns and Citigroup shares lost at least a third in value even as housing sales edged up a notch in November, according to The New York Times.

In an effort to shore up their capital bases, some companies, such as Citigroup and Merrill Lynch, are selling assets to foreign investors and contemplating further sales, a bail-out method that large firms have used in the past.

Merrill Lynch sold a $6.2 billion stake to the Singapore government, and an Abu Dhabi investment fund bought a 4.9 percent equity stake in Citigroup.

Jobs are likely to be hit as well. Merrill Lynch may cut up to 10 percent of its workforce, CNBC reported Wednesday.

The sub-prime fiasco took its toll on companies’ top brass, too. Citigroup and Merrill Lynch sacked their CEOs for poor risk management and Morgan Stanley’s top executive went without the customary end-of-year bonus.

When it comes to explaining who might be most at fault, opinions differ. Fortune magazine’s Shawn Tully attributes the debacle to an increased appetite on Wall Street for easy money. On the other hand, The New York Times’s Paul Krugman writes that the problem lies in Washington's aversion to market regulation, which gave Wall Street a free rein in a volatile market.

Headline links: An uncomfortable end to the year

Background: The sub-prime crisis hits Wall Street

Reactions: State banks alleviate the credit crunch

Opinion & Analysis: Past and future forecasts

Reference Material: How debt was repacked; sub-prime mortgages


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