Keep It Between the DitchesFebruary 15, 2011 Posted by: Joe Morgan, CFA
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.
A young boy, two hands on the wheel
I can't replace the way it made me feel
And I would press that clutch
and I'd keep it right
He'd say "a lil' slower son,
you're doin' just fine."
Just a dirt road with trash on each side
But I was Mario Andretti
When Daddy let me drive
- Alan Jackson
If you've ever been in a car crash or other traumatic sequence, you know the feeling when everything seems to happen into slow motion.
I was t-boned once while commuting home on a Friday and this frame-by-frame effect began before I even entered the intersection (with the green light, of course). It continued until I had pulled over and even seen the culprit pull her car to the curb behind me. Thankfully, no one was injured, but I was quite groggy for 10 minutes or so as we exchanged information.
As we struggle through today's economic challenges, I think more and more of this experience, which seems quite the corollary.
Mortgage underwriters, analysts, salesmen, executives, and even investors were not paying attention for some years leading up to the liquidity crash of '08. But the slo-mo effect began much earlier in 2007 when Household Finance announced dismal first quarter earnings due to write-downs from their subprime unit. By summer of that year, more than 100 mortgage brokers had gone belly up across the country and hedge funds — included two run by Bear Stearns — had disclosed enormous losses in the sector.
As the Wall Street folks slowly recognized their mistakes in this sector, end investors stayed put for awhile in the riskiest of securities, including very short-term debt that had to be refunded quite frequently. It wasn't until early 2008 until cash investors began to realize their principal invested in short-term holdings of SIVs, ARS and ABS commercial paper was solely dependent on the "next buyer" as opposed to true quality collateral.
A "throw the baby out with the bathwater"...Read More