Saturday, November 17, 2007

“We have not seen a nationwide decline in housing like this since the Great Depression"

The maze of weekend reading has produced some gems this week. The first was the quote above from Wells Fargo Chief Executive John Stumpf. Once in a while a banking industry insider hits on the exact correct perspective and provides a real zinger of a quip that puts the state of affairs in context.

Wells Fargo: All's Not Well

Earlier this week, Fortune provided commentary questioning the soundness of Wall Streets practices. The banking firms continual implement repetitive cycles of destructive behavior, never learning from previous lessons while always chasing higher fees.

In the past I have commented on the cycle of greed trumping common sense and adequate risk control in the banking sector.
Banks: The Worse is Ahead

Fortune declares “In pure destructive power, the subprime mess has become Wall Street's version of Hurricane Katrina.” From any perspective, the investment banks have finally stepped in a bog where there is no easy way to pull their foot out. The size of the carnage triggered by the credit meltdown is dazzling. A couple further quotes from the article provide additional perspective:

“Predictable because whether it's junk bonds or tech stocks or emerging-market debt, Wall Street always rides a wave until it crashes. As the fees roll in, one firm after another abandons itself to the lure of easy money, then hands back, in a sudden, unforeseen spasm, a big chunk of the profits it booked in good times.”

"The fee engine becomes so huge that these products take on a life of their own," says Tiger Williams, CEO of Williams Trading, a leading financial services firm for hedge funds. "Everyone rationalizes that it's safe because they're making so much money. But it's far from safe."

The Fortune article is a worthwhile read; the bulk of the article outlines how Merrill Lynch created mortgage backed CDO packages while failing to follow sound risk control practices.

Wall Street's money machine breaks down
How Merrill Lynch broke down in the subprime mess
The subprime mortgage crisis keeps getting worse-and claiming more victims. A Fortune special report.