Credit Suisse analysts have come up with a startling number:
That’s 52 followed by 9 zeros and inserting 3 commas (I am fond of commas).
$52,000,000,000 in subprime CDO’s at risk.
The losses are projected to have a ratio of about 80%/20% hedge funds/banks. This is not bigger than the Savings & Loan FDIC bailout amount of $125 billion about 15 years ago whose costs were born by the taxpayers through the massive sell off of assets through the sub-agency Resolution Trust Corporation, lovingly known by appraisers as the RTC. It was nirvana for appraisers, because we got to estimate values for complex foreclosed assets of defunct S&L’s, including hair-brained development deals and oddball asset classes conjured up by people who had no business doing what they did.
Major League Baseball’s All-Star game is going on right now and the Tour de France bicycle race (my favorite, second only to March Madness) began last Saturday. Baseball and professional bicycling have been plagued by scandals including steroids, human growth hormones, blood doping and others. I am big fans of both sports, but they have been tainted for many years with this form of cheating, whether or not the drugs were legal at the time.
Did it make me write off these sports as a fan? No.
Does it taint the records and perceptions of the players and does it place the sports at risk in the long term? Yes, perhaps.
When things are going well, its often easier to look the other way.
These professional athletes may have achieved milestone records, won championships and received big contracts in exchange for perhaps, a shorter life expectancy. Perhaps they suffered from a limiting understanding or an obscured appreciation of their own health risk.
Institutional investors and investment bankers also suffered from a lack of understanding of the real risks and what these subprime mortgages really represented. Like professional sports, there is nothing inherently wrong with subprime lending as long as ethics are adhered to and guidelines or standards are followed. While subprime loan applicants typically have a much higher credit risk, it was the issuers of these loans that were the parties that should have scrutinized by investors. The subprime mortgage market may not have melted down if basic lending standards were applied in the subprime lending process.
Don’t mean to pontificate, but its that lack of an appreciation of risk, and the disconnect with asset values that is something I deal with every day as an appraiser. Plus, its an easy way to speak about what’s on my mind in one post: MLB, The Maillot Jaune and a changing real estate market.