Page 2 of
2 Subprime fallout: Save Our
Souls By Julian Delasantellis
that, by Friday afternoon,
investors were crowding the stock market's exits,
having sold out and heading for the hills.
Many right-wing pundits, in their
ever-more difficult effort to maintain the George
W Bush-economy-triumphant-over-all talking point,
continue to attempt to play down the seriousness
of the subprime crisis, noting that, even amid all
the bad news regarding the US real estate sector
being proclaimed all across the non-Murdoch media,
over 90% of US homeowners are still continuing
to
meet their mortgage obligations on or near on
time.
This is true, but meaningless. As I
have written many times, it may be called the
subprime crisis, but the real problems lie not
with the poor subprime borrowers awaiting their
upcoming and inevitable foreclosure, it's what
happened to that subprime mortgage paper as it got
packaged and repackaged, leveraged up,
collateralized, borrowed upon, and then leveraged
up again, while it moved further and further up
into finance capital's elite addresses. A $1 loss
on a $100 stock should not be a problem, unless
you've used your $100 investment to buy $100,000
of that stock on margin. In that case, you are
wiped out.
It is true that the general
market is still only around 5% off its recent
highs, but it is in looking at the market's
internal dynamics that you can see just how
serious things are becoming.
It was in the
March selloff that the market basically decided to
throw the pure subprime lenders, such as New
Century Financial and Novastar, onto the refuse
heap of finance history; as we move ever deeper
into the dark cellars of this crisis the market is
moving to target a far pricier prey. Far and away,
the biggest losers in this month's selloff are the
general banking and finance sectors, as the market
now accepts and prices into stock values the fact
that subprime contagion can now be found behind
the regal polished doors of Wall Street's best
addresses.
The entire banking and finance
sector is trading at or near its lows for the past
year, and much of that decline has occurred in the
past two weeks. The S&P banking sector is down
over 12% in that period; mortgage leader
Washington Mutual is down 22%, Countrywide
Financial is down 26% as news reports spread that
the US government is now investigating its chief
executive officer, Angelo Mozilo (last year's
media darling for his supposed role in bringing
home ownership to the masses) for his previous
selling of $130 million of his personal stock in
the company; a fairly sagacious move with a stock
whose price has declined 67% since February.
As surely as night follows day and autumn
follows summer, in the financial markets the fuzz
follows the froth, the cops follow the carousal.
Market cheerleaders counter that other stock
sectors, especially export-orientated and health
care, are holding up better as finance falls away,
but as an argument for the continued general
health of the market that is very misleading.
Finance is the lifeblood of commerce; to
expect the general economy to prosper if the
internal malfunctions of the finance sector are
rendering it unable to fulfill its traditional
function as an intermediary between lender and
borrower is about as realistic as assuming a body
can survive without a circulatory system. In
contrast, using the prosperity of America's
overpriced, gold-plated employment-based health
care system as a proxy for the wellbeing of the
general economy is similar to saying that a
community is prospering because all of its local
vampires are healthy.
The relatively
bullish US employment report of October 5 made
some market observers wonder whether another
Federal Reserve interest rate cut would be needed
at the Fed's next meeting on October 31, but the
market turmoil has settled that question. As I
wrote in my September 19 ATol article, A rate cut with a shoeshine and a
smile, Fed chief Ben Bernanke's actions
during the summer have proven that he is more than
willing to step into Alan Greenspan's big shoes as
supporter of stock prices of last resort.
At least in the short term, how much good
that will really do is questionable; the previous
rate cuts of August 17 and September 18 have
seemed to have had an effect most analogous to
that of the newly popular energy drinks, a quick
buzz of buying that rather rapidly wears off.
What more rate cuts will certainly do is
give another kick to the US dollar while it's
already down; since the commencement of interest
rate cuts on August 17, the greenback has fallen
over 6% against the euro, reaching record lows of
over 1.43 euro/US$. One thing that this will do is
continue to drive crude oil prices further up
towards $100 a barrel. As I wrote in my September
20 ATol piece, US rate cuts: Like a blow to the
head, the relationship between a
falling dollar and higher crude oil prices is one
of finance's most reliable tautologies. This will
drive home heating oil prices up now, and gasoline
prices up after the New Year; if you've got people
who heat their homes with oil on your holiday
list, big thick warm wooly sweaters (very much
unlike those worn by the Fox Business anchorwomen)
might this year be the gift that keeps on giving
and giving and giving.
Is it possible that
America might be facing an extended period of a
declining standard of living, maybe even of living
within its means? Heavens, what a terrible
concept, you can hear political opinion and
posturings from all across the ideological
spectrum from the 17 or so odd (and, yes, some are
very odd) candidates currently competing for the
Democratic and Republican parties' presidential
nominations. It's important to support the troops;
it's a lot more important to support the credit
cards.
In much the same way that in 2000
candidate George W Bush promised the US military
that "help was on the way" and then threw it into
the abattoir that is Iraq, for the beleaguered
American shoppers till they droppers, a rescue
from the country's current economic difficulties
may soon be on the horizon.
Over the past
week the financial press reported rumors that
China's state-owned commercial bank, CITIC, the
country's eighth-biggest lender, was looking to
buy a good sized stake in the US investment
brokerage house Bear Stearns, the bare-knuckle
Wall Street brawler whose default on two in-house
subprime hedge funds was essentially the starter's
pistol for the midsummer crisis.
I wrote
about this concept, the large pools of Asian and
oil exporter state managed capital, called
Sovereign Wealth Funds, (SWFs) in my August 21
ATol article, When the big guns fail, call in
China. CITIC is not technically an SWF,
but the principle is the same; it's 21st century
state capitalism coming in to solve and benefit
from the problems caused by the excesses of
unregulated 20th century market capitalism.
The Economist magazine estimates that
worldwide SWFs have over $3 trillion at their
disposal; that represents about 5% of the world's
total base of investment capital. The SWF horde is
far and away the only source of funds big enough
to dig America out of its subprime mess, but the
inherent drawback of allowing foreign state
capital to bail America out of the difficulties
created by its long-standing desire to live beyond
its means would be that the nation would in effect
be selling the ownership of its very profitable
banking and finance industries to other nations.
Like selling yourself out of your own
house so that you can then pay a monthly rent to
the new owners, generations of economic servitude
would be the price of yet another all too brief
period of illusionary prosperity.
No
wonder those in the SWF home countries don't have
to watch Fox Business to get that perky feeling.
Julian Delasantellis is a
management consultant, private investor and
educator in international business in the US state
of Washington. He can be reached at
juliandelasantellis@yahoo.com.
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