The Disease That Was Subprime Lending

Those who think that the subprime mess was an unfortunate accident that could not be anticipated by management should read a BusinessWeek story called Sex, Lies, and Subprime Mortgages. Fraud and trading of sexual favors for mortagages that could be bundled into hot securities were supposedly common, and whistle blowers were shut down by managers who didn't want the good times to end. What went on was literally criminal, and I suspect that the major Wall Street institutions simply turned blind eyes to everything in their quest of deals that could yield profits and a quick exit before the players got caught. Unfortunately, the collective moral depravity set off a chain reaction that we will be facing for years. It does make me wonder what similar may have gone on in credit default swaps, credit card-based CDOs, and other such debacles.

JP Morgan to Sweeten Bear Honeypot

It sounds as though JP Morgan may have to up its offer for Bear to $10 a share, and the entire situation is creating an interesting dilemma. ON one hand, the Fed is looking to ensure that commerce continues. It's not that Bear Stearns itself is so important to the economy so much as its position as a middleman in so many transactions. The problem is that if Bear had gone into bankruptcy, then the court would have had no choice under the law but to freeze all transactions in which it took part, no matter what it was actually doing. That could be a big enough hiccough to derail enough commerce that suddenly everything would come tumbling down.

So the Fed wanted to keep this from happening, and I can understand that. But Bear Stearns is a publicly-traded company, and the public that trades the company was pretty upset about the price being only $2 a share when it had gone for as much as $30 on Friday - and that was a loss of two-thirds of its value. According to a New York Times story, shareholders were ready to head to court.

On one hand, I don't have a lot of sympathy for the shareholders. They wanted the high return and were happy to overlook the questionable nature of the business that the bank was doing. Hey, it's capitalism, and there's risk. Why is it that so often so many people who have money to invest suddenly want welfare for the rich? But the intriguing issue is which governmental (quasi or not) agency has precedence when it comes to the conflict of interests? Can the Fed encourage a fire sale, or does the SEC have to come in on the side of investors, who want as much money per share as they can get?

The new offer must be approved by the Fed, which had initially balked at the new price.

If the Fed balks, does the deal come apart? This seems like a deal that is so important to the economy that the Fed is effectively powerless to say no, which means it has little leverage in a negotiation.

A new deal could raise even more questions about the Fed’s involvement in the negotiations. As part of the original deal, the Fed guaranteed to take on $30 billion of Bear’s most toxic assets. The central bank had also directed JPMorgan to pay no more than $2 a share for Bear to assure that it would not appear that the Bear shareholders were being rescued, people involved in the negotiations said Sunday night.

Might not the SEC say, "Sorry, folks, but the directors can't legally agree to such a deal?" I don't know that different branches of business regulation have ever clashed in such a way.

The Next Corporate Scandal

When writing a recent article on how regulators and prosecutors were going after people farther down the authority line in corporations, a corporate lawyer and former federal prosecutor said that he expected the subprime mess to eventually turn into investigations, at least. Already there is confirmation that it has. According to an organization called the Asymmetric Threats Contingency Alliance (ATCA) - a group of government officials, business people, academics, "original thinkers," and some 250 members of major media - the FBI "has opened criminal investigations into 14 companies relating to improper subprime mortgage loans," while the SEC has started some three dozen civil investigatons.

If you think that the write-downs were bad enough, just wait, as there will be plenty of lost value when companies spend the time, money, and attention to deal with these investigations. And given that we're talking about the subprime debacle, these won't be small companies. I think we can expect them to be among the largest global financial companies. Bear Stearns, Goldman Sachs and Morgan Stanley have all said that government entities are asking about their subprime activities. Reported SEC targets include Swiss bank UBS AG; US investment banks Morgan Stanley, Merrill Lynch, Bear Stearns; and bond insurer MBIA.

Wachovia Penny Wise and Billions Foolish

Although I don't bank with Wachovia, I walked into a branch the other day to cash a check that came in late from a client, wanting to deposit cash rather than wait for the instrument to clear. "There will be a five dollar charge to do that," said a teller who was remarkably unpleasant for 8:40 in the morning.

"But that's ridiculous," I said. "The bank is obligated to pay me."

"Sorry, but that's the bank's policy because you're not a customer. Do you want to cash the check or not?"

This is the type of pettiness that makes people hate banks. It's called charging people for the dubious privilege of doing business. Bad enough as a non-customer, I've heard of banks considering charging customers to use teller services. Are the branch staffs really so entirely busy without a let-up that additional people walking up will require additional staff? That certainly wasn't the case where I was, and I doubt it's really that much of a problem over all.

But then, many banks have long since decided that customers were an annoyance. We're just the little people who keep insignificant sums of money in the bank, so it can lend. No, the real important lines of business are the speculative ones - you know, the ones like those derivative investment vehicles that cause banks to write down billions upon billions of dollars of institutional value.

Wachovia wrote down $1.7 billion in its last quarter, and saw only 3 cents per share earnings. Thanks, collateralized debt obligations. Oh, and a $24 billion acquisition of Golden West Financial Corp. and its steady supply of mortgage losses.

Instead of sitting on the roller coaster of questionable profit and trying to squeeze every penny out of the public, here's a radical notion: treat customers well, get their business, see them refer others to you, and be more intelligent about taking risk. Give up the $5 here and there while stemming the grossly unnecessary losses, and it can add up to real money.

Wolfgang Münchau on the Current Financial Crisis

The Financial Times has a good column by Wolfgang Münchau, noting that if the current credit crisis were just about sub prime mortgages, it would already be over. The problem is that there is way more money tied up in other ventures that are find so long as defaults and insolvencies stay at reasonably low levels. Combine that with a recession - and it seems pretty clear that economies are slowing - and the results could be really bad.

O'Neal, Merrill Lynch, and Boards

Via a PR person, I heard from Ron Garonzik, vice president of leadership talent at Hay Group, a New York-based consultancy. He thinks that Merrill Lynch's board is making a mistake in naming a board member as even an interim CEO.

The fact that its Board has appointed a board member -- a non-executive chair -- is indication of the absolute breakdown of its accountability of ensuring business continuity for Merrill’s most critical management positions. The success rates of outside CEO hires are grim: it is well documented that the chances of getting the boot of a forced resignation are much higher for external CEO hires as compared to insider hires (by 20 percentile point or more for North American companies).

That certainly squares with what I've heard over the years. Plus, if a company develops candidates internally, it isn't at the economic mercy of someone from the outside who already probably has a good deal and whose personal fiscal future now has to be guaranteed under what are now more questionable circumstances.

I did take some exception to the idea of a breakdown of the board's accountability, but Mr. Garonzik did have a good explanation:

The breakdown in accountability isn’t about the stopgap measure of appointing an interim CEO – but rather that fact that no credible successor is waiting in the wings to take over from O’Neal. As if things weren’t bad enough with Merrill’s name being dragged through the mud with investors, and that they have to deal with the negative publicity concerning O’Neal’s departure package. On top of all that, they have to deal with the uncertainty of not having a pair of steady hands at the helm of a venerable “Wall Street” firm. That alone is evidence of the board’s failure to meet it’s accountability of ensuring business continuity.

Now here's where the board really fell down. When O'Neal was coming up through the ranks, so were a number of other people. But the CEO got rid of much of Merrill's old guard - and potential successors, or challengers. The board allowed him to do this, which really was foolish. The evidence is that the board evidently had to consider a short-gap measure and someone from the outside to follow. A company with a well-developed succession plan always has someone who could reasonably well take over.

Unfortunately, this isn't going to be an issue just for Merrill Lynch. Investors are calling for the head of Citigroup's Charles Prince. Does that company have talent ready to go? And if New Jersey Institute of Technology finance professor Michael Ehrlich is right, structured investment vehicles - the class including the securitization of mortgages - could still face another $30 billion to $50 billion in losses. According to this from a press release:

The SIV rescue attempt, led by JP Morgan, Citibank, and Bank of America with US Treasury Dept encouragement, will not stop the losses, Ehrlich said. The SIV bailout fund known as the Master-Liquidity Enhanced Conduit (M-LEC) will, at best, slow down losses because there is no Federal bailout money in the plan.

"The fundamental market mispricing of the real estate and also the credit risk markets will be corrected," said Ehrlich. “In the best case, the M-LEC might forestall a panic leading to an over-correction in pricing. Unfortunately, there is likely to be the unintended consequence that the M-LEC will discourage new capital from flowing into this market.”

That leaves the question of the red ink or the blood on the water will spill faster.

Mortgage Superfund Worrying Financial Experts

Although the Treasury may be involved with the concept of bringing together Citigroup, Bank of America, and JPMorgan to create a $75 billion fund to help prop up a sagging mortgage market, not all experts think it's a good idea. Alan Greenspan questioned whether it was wise to intervene in the market, as reported by CNNMoney.com and others. Today, the Financial Times reports that during a trip to South Korea, Warren Buffett has added his own voice of wariness:

“One of the lessons that investors seem to have to learn over and over again, and will again in the future, is that not only can you not turn a toad into a prince by kissing it, but you can not turn a toad into a prince by repackaging it,” Mr Buffett said during a one-day visit to South Korea.

“But very imaginative people in the securities market try to do that. If you have bad mortgages they do not come better by repackaging them. To some extent the chickens are coming home to roost for the mortgage originators and securitisers,” he said.

Both of them have expressed concern that the market should be the force stabilizing the situation, and not governments and banks. I'm not the most laissez faire guy in the world, but in this case I'd tend to agree. The people who set up these investments and who then promoted the hell out of them tried to build with sub-standard materials. You don't fix a wall by painting it. You fix it by finding the weak spots, reinforcing the structure where necessary and replacing the fallen plaster. (I use this analogy because it literally hits close to home, as I'm in the process of fixing a wall.)

To use the money to boost prices unrealistically might make some well-off people happy that they don't take a bath, but to be fair, many of the people who bought into these loans are bearing a heavy burden at the moment. Why should they be the only ones paying the price?

I can hear some people thinking it now: They should have known what they were getting into and seen that they shouldn't have taken more loan than they could afford. But we could say the same about the investment crowd. If anyone should have known what they were getting into, it should have been these people. That's what they do for a living. Artificially reduce the pain, and not only do you run the risk of only temporarily propping up this financial Rube Goldberg machine with a more painful crash to come, but no one learns anything from the experience. They become the Peter Pan crowd that never grows up and never learns that actions have their consequences. If they lose money, well, then they lose. Hopefully they will be more prudent about future investments, and they are also unlikely to face living on the street as a strong possibility, as are many who the very same investors expect to manage with increased mortgage payments and no greater financial resources.

Banks Start Fund for Credit Market

Working with the Treasury department, Citigroup, Bank of America, and JPMorgan Chase are creating a fund that will buy between $75 billion and $100 billion in structured investment vehicles (SIVs) - the mortgage-backed securities that have seen such trouble recently. The New York Times has a story that has yet another piece of the puzzle, which can be hard to grasp if you come at this from the outside, like I do:

The effort is intended to help SIVs that need to sell securities do so in an orderly manner. Bank and government officials are concerned that if these vehicles are forced to dump billions of dollars worth of debt in the coming weeks, it could cause a repeat of the crisis that rattled markets in August and sent the cost of mortgages and other loans soaring.

In other words, these SIVs, like many other forms of financing, come with strings. The people running them have to ensure certain conditions or face serious consequences, like being declared in default (or whatever the equivalent for an SIV would be):

[Christian Stracke of the research firm CreditSights]said that by serving as another buyer of the highest-rated securities, the banks are hoping to ease the immediate strain on SIVs, which could be forced to sell billions of dollars worth of assets in a fire sale if they are not able to raise new financing and when their capital falls below certain thresholds. The effort, however, will not resolve the longer-term problem many SIVs face with more risky mortgage bonds, he said.

The SIVs have financial covenants, and they cannot allow their free capital to fall too much. So they need to sell more short-term debt to keep investing in the long-term debt to get the cash flow to pay off the short-term debt and keep afloat. It sounds, to me, like a legalized version of a Ponzi scheme, but then I'm not a high finance person.

Supposedly the fund - called a conduit - will invest only in top rated securities and won't help the sub-prime area that has most of the fundamental trouble. But then, one of the main problems has been that the rating agencies apparently were favorable in their ratings for the sub-prime. Why should anyone believe that a AAA rating actually means anything, either?

“For me, this is more of a P.R. blitz,” he said. The banks are “saying, it’s not just that we are doing this on an ad hoc, individual basis. Rather, we have a plan and consortium in cooperation with Treasury, which gives it a veneer of respectability.”

But the institutions themselves have lost tremendous credibility because of culpability. Maybe people will forget, or maybe the new investments are actually sound. The question is who will bet on that?

Foreclosures Up, Income Increases Uneven

The problem with focusing on only the "big picture" issues of the economy is that you miss the little guys who, collectively, are the real driving force. According to the Financial Times, U.S. home foreclosures doubled last month:

The number of foreclosures jumped to 223,538 in September, 99 per cent higher than the number last year, though down 8 per cent from August, according to RealtyTrac, which compiles housing data. California had the largest number of foreclosures, with 51,259, and Florida was second, with 33,354.
Nevada, which has seen explosive housing growth around Las Vegas, had the highest rate of foreclosures, with one for every 185 households. The overall foreclosure rate was one for every 557 households.

Countrywide Financial, the nation's largest mortgage lender, said "The number of foreclosures jumped to 223,538 in September, 99 per cent higher than the number last year, though down 8 per cent from August, according to RealtyTrac, which compiles housing data. California had the largest number of foreclosures, with 51,259, and Florida was second, with 33,354. Nevada, which has seen explosive housing growth around Las Vegas, had the highest rate of foreclosures, with one for every 185 households. The overall foreclosure rate was one for every 557 households."

RealtyTrac said the foreclosure jump was due in part to sub-prime borrowers being unable to make payments after rates went up. Countrywide Financial, the nation's largest mortgage lender, has seen deliquencies as a percentage of unpaid loans go to 5.85 percent, versus 4.04 percent a year ago. Its issuance of ARMs has dropped by 76 percent. Daily mortgage loan applications are down by 39 percent. This is alarming news.
And now factor in what the New York Times reports:

"New data shows that after adjusting for inflation, 95 percent of Americans reported smaller incomes to the tax man in 2005 than in 2000."

People had a bit more in their pockets due to the tax cuts - from about $20 a month for those in the bottom half of income to $5,400 a month for those in the top 1 percent. And only those in the top 5 percent of income saw higher incomes both before and after taxes. More than three-quarters of all taxpayers make less then $5,400 per month. When the bulk of the little guys are getting hit hard, the entire economy will follow. And I think the signs of this are getting clearer than I'd like. This is one of those times that I sure hope I'm completely wrong.

Greenspan and Trusting the Market

In a 60 Minutes interview, Leslie Stahl asked former Fed chairman Alan Greenspan whether he knew what was going on in the sub-prime lending market. His answer?

While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late. I didn't really get it until very late in 2005 and 2006.

Huh? An economist with his experience didn't understand that lenders will be happy to take outrageous risks if they think they can sell off the loans and not have to deal with the defaults? It's not as though no one brought it up. According to the CBS story, former Fed governor Ed Gramlich said that he had proposed examining the lending practices, but that Greenspan rejected the idea. Apparently that is the case:

"I thought that…we would not be capable of doing what he was suggesting," Greenspan says.

"But if sitting on them, taking some regula-what…" Stahl asks.

"Well, I think not," Greenspan replies.

"Even looking into it?" Stahl asks.

"It's nothing to look in to particularly because we knew there was a number of such practices going on, but it's very difficult for banking regulators to deal with that," Greenspan says.

So, he knew they were going on. I cannot - simply cannot - believe that Greenspan couldn't see the writing on the Wall Street, not after warning about irrational exuberance. No way to check on this? Not even with all the intellectual power and computing systems that the Fed has? Couldn't find a way to do some random checking on credit scores that were probably part of the lending record versus the size of loan and verified income? No way to see how many of the loans depended on lenders not verifying income, maybe? I don't believe it. This wouldn't be rocket science. and then there was this interchange:

"Just remember we raised interest rates at every meeting from June of 2004 till I got out of office," he says.

"You raised rates in 2004. But only after you held interest rates at historically low level for three years, while the bubble, the housing bubble was forming," Stahl points out. "And that you had 13 rate cuts in that period of time."

"It was our job to unfreeze the American banking system if we wanted the economy to function. This required that we keep rates modestly low," Greenspan explains.

Unfreeze the banking system? This sounds dubious. American companies had clearly over-invested in the 1990s and it would take them years to digest all that spending. Low interest rates weren't needed for investment - they were needed to get consumers to spend.

Perhaps Greenspan truly believed in the market the way I see many treat it, almost as a form of religion. Free everything up and it will all work out. I somehow don't think he's try to rig the system to let certain people take advantage. When asked about the major American car companies, he replied, "I would suggest they focus on selling, creating better cars for their customers," rather than depend on lowered interest rates. Perfectly sound advice. They aren't selling because they aren't producing products that consumers want most.

But there's a problem with the market-cures-all vision of unfettered capitalism. Depending on a market isn't relying on some invisible, rational, impartial mechanism that evens out the bumps. It means trusting to human greed, fear, and emotional goads that cause people to do the most unbelievably stupid things. Lending large sums at high interest rates, which will only go up, to people who will be unlikely to maintain payments is stupid business. It's hoping that enough of the money will come in to cover the losses. This isn't business; it's gambling.

As happens with most such decisions, what people do is rationalize why what they want to do really makes sense. Maybe that's what Greenspan was doing - hoping that things would work out as they were "supposed to."

More Debt Madness Upcoming?

I'm on a number of specialty email lists, including one from a major international risk management firm. It ran an opinion piece from a reader who noted something that I hadn't realized: companies have created the same types of security derivatives based on debt for the credit card market as they have for mortgages. This should shake everyone's shoes.

People have been living on credit, at least in the US, as many have noted. Fueling much of their buying has been low mortgage rates. People refinanced, pulled out cash, and made purchases, thinking that higher housing prices would cover their rears. Now that it's ending, and many mortgages are suddenly rising in price, they will start turning to credit cards.

According to this opinion piece, the US has a total of $904 billion in revolving credit debt - mostly credit cards. The UK has $100 billion on plastic. Bank of England data says that British banks have written off $18 billion in bad debt over the last 12 months. Moody's suggests that American credit card companies have seen bad debt jumping by almost a third in one year.

Credit cards are the last refuge of those not making more money who are trying to manage higher costs of living, and that's piling a lot of weight on what appears to be a flimsy structure. If you thought the sub-prime mortgage situation was a fiasco, what do you call what will happen with credit cards? Unmitigated disaster? Or depression?

A Sudden Realization About the Sub-Prime Crisis

I've written a fair amount about this topic, so this will be short. (Having impending deadlines, like other forms of death, concentrates the mind wonderfully.) But when I started thinking about how this debacle came to being, I wrote the following:

By combining pools of mortgages with rising housing prices, lenders were able to wash off the risk because the failure of some percentage of borrowers still left the pool safely covered.

That was the explanation I had read, but something bothered me about it. It didn't quite make sense that some juggling could improve the credit rating that much. After all, to really cover the potential default rates, you'd probably need to add a significant number of "good" mortgages that would be unlikely to default so the return on the investment had a reasonable chance of occurring. But then the default rates shouldn't have had that kind of impact. And yet, it seemed that the derivative securities were largely based on poor credit lending. How did bundling them get better ratings than the individual loans would have?

After paying attention to more reporting on the subject, I think I now understand. The rating agencies abdicated any ethical or moral responsibility to give an honest opinion on the derivatives because they are paid by the very financial institutions that were issuing them. Unfortunately, investors pay significant heed to these ratings and often pass on doing further due diligence. I could understand that from individuals who are intimidated by understanding financial matters. But these derivatives could never have taken off without significant institutional investor participation. What happened here? Don't these large organizations that hire lots of brainy people actually do their own thinking? Actually, many rely on the opinions of others far more than you might thing, certainly in proxy voting issues, as I learned in writing an article for Corporate Secretary.

So many individual investors, putting their money into money markets, pension funds, and other aggregations of cash might be taking a larger risk than they realize, because they don't always know who's really making the decisions. Where has the financial media been through all this? This story has an Enron-like cast, with lots of people writing in awe of the clever financing and no one pointing out that the Emperor ruled in the buff.

Blame the Home Buyers

I've heard a couple of broadcast pieces lately that note how many of the problems with the sub-prime market meltdown started with home buyers lying about their incomes on the mortgage applications. Although I haven't yet heard anyone come out and say, "It's all their fault," there's an undertone in the reporting and in the remarks from experts.

It's total bunk, in my opinion. The responsibilty for prudent lending isn't the customer's. Risk management is clearly the duty of the lender. Why did the people lie? Because they had poor credit and yet desperately wanted to own their own home instead of continuingly putting money into a landlord's pocket. That's not a hard psychology to predict. No one goes into this type of financial obligation consciously thinking that they are going to fail. They tell themselves that it will be tough, but that they'll be able to do it. And then they don't read the fine print of how rates can suddenly jump.

These were people motivated by the desire to get out from under. Why did lenders grant lans? Becasue they figured they could squeeze out that much more profit. It's a classic credit strategy: you get more return for risk that is greater. I can understand that, but you have a problem when the money you want cranks the risk up to a much higher degree. They lenders should have done projections to see how much danger loans were in from potential default at different levels of interest - not from a lack of inherent trustworthiness of the borrowers, but because they changed the economic conditions to make payback virtually impossible.

"But that's why we wanted a high enough income in the first place," they will claim. Oh, please, don't make me laugh. They wanted higher income and yet wouldn't verify? The only reason they did verify - or check enough - is because they wanted to do the business too badly. You'd think that a mortgage company would have all the power in a negotiation, but, ironically, they didn't. This is a perfect example of neediness in a negotiation (see my review of Jim Camp's book, No).

The entire credit industry wanted every penny it thought was out there, and so completely dropped all the barriers of logic, reason, and prudence. Last week, the Financial Times had a story about web sites that would charge people to act as income verification, even though the people had never worked for them. Yup, that would be financial fraud. But to trust the word of a phone call? Not to check what business the company was in? How long does it take to run a standard credit check on a company and how much does it cost? The answers are not long and not much. If the borrowers were literally criminal in their misrepresentations, the lenders were figuratively criminally stupid.

Although it will be painful for the global economy, I do hope that governments don't drop interest rates to effectively bail out the lenders. It's not as if they haven't seen the potential consequences of foolish risk taking in the past. How many lessons does someone need before having to pay for their actions? We expect poor individuals to pay at the first mistake. Perhaps it's time that business leaders do their own hard times.

Business Using Sub-Prime as an Excuse

There have been many news accounts of how the meltdown in the sub-prime credit markets have become like a contagion, affecting a growing amount of all business. The reasoning, as I understand it, goes something like this:

1. Housing prices kept escalating, so people had burgeoning amounts of equity, at least on paper.



2. Sub-prime lenders kept taking on more risk because high demand for homes and rising housing prices made it seem relative safe.



3. Lenders bundled together derivative securities that held the mortgages.



4. By combining pools of mortgages with rising housing prices, lenders were able to wash off the risk because the failure of some percentage of borrowers still left the pool safely covered.



5. Prices topped and dropped, and a growing number of people were defaulting - not just on first mortgages, but on secondary ones, including equity-backed lines of credit.



6. Someone had to start paying out money, which meant credit insurers and mortgage lenders alike had to start pouring out cash, which meant reducing liquidity.



7. Those with lots of cash didn't want to lose it, so they stopped underwriting so much of the business being done.



8. As a result, some groups are losing money on deals because they couldn't get the terms they needed, and some hedge funds started to close because they were effectively undertaking high stakes gambling and finding that the house eventually wins.



9. Private equity firms, which had been indirectly fueling the rise in stock prices (not some quick miracle of economic conditions), are backing away from deals because they can't get the terms and returns that drive their business models. (Friday's Wall Street Journal had an article called "Leveraged Buyout Remorse?" with the following first line: "Having spent years racing to put deals together, some private-equity firms are puzzling over whether they should take them apart.")



10. The stock market is likely to see an increasing pinch as people and institutions aren't rushing to make a killing on the next takeover prospect.

So it's all the fault of the sub-prime markets, we hear. But I don't buy it. Yes, that is a mechanism, but it's not the finger pulling the trigger. That honor belongs to greed unchecked by business sense.

In the face of economic history, expecting that prices relative to other demands of life could rise forever, and even planning on that happening, is idiotic. That has never happened and isn't about to start. What we are seeing is the same as the tulip market mania of the 16th century. It's multi-level marketing on a grand scale. It's a ponzi scheme. At each point, furthering of the business "model" depends on someone having the expectation that no matter what the inflated price, he or she will shortly see the same type of return. If a business or investor wants to take some risk for high returns, that's fine, but it's called risk for a reason. There is a measurable chance, sometimes large, that you will lose part or all of the money you've invested.

To put virtually all of your eggs into this one basket is insane. Yet that's what the markets have done. All manners of companies have been betting on consumer spending to continue. But the spending wasn't itself fueled by increases in wages. No, because that would lead to inflation and corporations having higher labor expenses, and smaller returns. Instead, everyone more or less turned their heads, opened the credit taps, and let the money flow because, well, those increased housing prices would make everything fine in the end. One could always refinance, pay off the one lender at risk by transferring the risk to another, and take a little extra money out at the same time.

It's over. People are increasingly stuck in houses they couldn't afford and that, with dropping prices, they can't afford to sell, because they would remain in debt as the sales price wouldn't cover the mortgage. The markets are experiencing (I'm not sure they realize quite what is actually happening) a cold turkey economic abuse program. Now governments are involved, making cash available to keep enough money in the system to leave it afloat. Although you won't see it called such, this is the world's largest economic bailout masked as maintaining market liquidity. The sums that are going in and will probably continue to pour in will dwarf the savings and load debacle this country experienced. I wouldn't be surprised if it ultimately overtook the real spending during the Great Depression. We are in a pile of doo-doo, and all the finger-pointing and rationalization won't change the fact that it is of our own making.