“There’s No Such Thing As A Free Lunch” and other banking blunders.

“ZURICH, Switzerland – Swiss banking giant UBS AG said Monday it will write off a further $10 billion in losses in the U.S. sub-prime lending market and will raise capital by selling substantial stakes to Singapore and an unnamed investor in the Middle East.”                                                            ap


To continue discussions on the magnitude and reach of the U.S. sub-prime crisis, it only seems to bring more questions, op-ed writings, and political opinions.  I understand how individual property owners fell into this euphoric stupor. That’s simple.  All sub-prime lenders had to do is tell them now, unlike any other time in history, you can borrow more money on a larger home and not pay any money down. 3-4 years prior to this, these same people would not even qualify for a mortgage much less qualify for a home valued 10 times their annual income without a down.

 Now, someone explain to me how these lenders convinced huge investment banks, not just here but globally, to buy into this pipe dream? How is it that some of the largest banks in the world, the most brilliant financial minds on earth, were duped into investing so much as to risk financial disaster?

 For about a year, maybe longer, I have read several pieces in the Financial Times concerning the housing market and mortgage lending. I had been involved in the commodities side of the home industry in the past and have always kept a close eye on any news related to the housing market.

 More than once, FT warned of an impending downturn in homes construction. Simple numbers have been used for decades. When the market reaches somewhere around 1-1/4 to 1-1/2 million homes on the market, construction slows down to let sales catch up. This indicator has been followed for over 30 years and corrections in the market have taken place to fix it, grudgingly, but healthily.

 Next, came the warning of how a different style of mortgage lending was incredibly dangerous not only to the new, naïve homeowner, but also to the relatively new lenders such as Countrywide. FT laid out a simple set of paths that “if this happened and this happened then this would occur.” These warnings came a year and a half or so before the actual events took place.

 It wasn’t hard to understand even for a layman. When one of my sons talked of building a house and asked about the “No Down” type of loan I simply repeated what I learned from the Financial Times. Don’t do it! I also told them to wait six months or so because a downturn in building always brings lower prices not just on commodities but in many cases labor. Waiting saved them about 10-12% on building their new home. They also heeded to the warning of “there’s no such thing as a free lunch”  and sold their existing home before signing an agreement with a builder giving them their down payment.

 Last spring when the sub-prime debacle began to unfold Ben Bernanke went before Congress and explained that this was just a small ripple in the financial markets – “Not to Worry”. Looking back, was he lying or just stupid? At first I concluded that he was lying, only because no one could be that stupid. Today the headlines read about many of the top investment banks in the world that fell under this spell now writing off billions of dollars. Were they all that stupid?

 This past week we have been handed Treasury Secretary Hank Paulson’s magical “non-regulatory” plan to pass the buck off to the Feds who were brilliant from the beginning in this. What a joke! The Fed is now bailing out Bear-Sterns and establishing what analysts are calling a “Backstop” for colossal financial blunders using taxpayer funds to cover some of the riskiest investments. We are the ones that will cover their risk from now on.

 When I buy stock I understand the risk involved. Even the risk of buying something as simple as a lottery ticket is understood. However, I also realize the rewards when the stock I purchased yields dividends or is sold higher than when I bought it. There was no mention of the American public sharing in the wealth if and when the risk we covered begins to pay off. No, we are only involved if there is failure.

 We are about to allow the very people who were totally clueless from the offset of the sub-prime meltdown to use taxpayer money to cover the bets of the same Mental Giants of the investment banking industry who apparently never heard “There’s no such thing as a free lunch.”