If there is a maxim in economics, it is that History (economic) is repeated . But sometimes it does so even with an astonishing repetition rate, especially when the socio-economic damage caused by previous outrages still keeps the hot corpse on the mortuary table.
This has been the case of those disastrous subprime mortgages , which were spread throughout the United States giving money to customers with a credit profile that showed evidence that they could never repay the debt. The rest of the story they already know perfectly, and so perfectly that they will be surprised to see now a reissue of the fury that high-risk credits once again make on Wall Street . No, we do not learn; or rather: some do not learn (or want to learn).
Subprime mortgages were garbage mortgages, and in addition someone started the fan.
As we said in this article, those subprime mortgages granted dollars and dollars to people without repayment capacity, without guarantee, without liquidity, without a stable contract, without a loose salary … and often even without work. But none of this mattered in those crazy two thousand years in which happiness was purchased based on debt , and in which only was intended to collect the quarterly bonus for having placed hundreds of other mortgages at any price.
In addition, these rotten titles were disguised under the most innovative financial engineering: they were packaged, cut up, and sold … with the lethal result that this carcinogenic credit risk was disseminated throughout the system. And those subprime mortgages ended up in the portfolio of investors who did not have the remotest idea (and it was not possible to know for sure even if they tried) of what they had actually sold, as it was seasoned with unrealistic ratings from the agencies rating agencies .
Thus the poison was inoculated by the entire financial world, but the ultimate goal that was at the same time the origin of everything was achieved: the bonuses were collected from those “discretionary depositors” of easy loans to impossible customers .
Those subprime that were high-risk debt was on Wall Street where they started to rage. But fashion quickly spread through much of the world capitalist system. You know, it became popular that “take the money and do not look back”, but is that in this case is forward to where they should look, and neither did . So I know several cases of middle class families who were mortgaged for 120% of the appraised value, and with that money they bought the flat, they furnished the house, and they bought two high-end cars. Do they understand that they did not look to the future (neither the mortgaged nor those who gave them the money)?
I remember even a whole president of the government announcing that there was nothing to worry about in Spain, that we were witnessing a mere financial storm in the markets without consequences in the real economy. In addition, this president strongly affirmed that in Spain there were no subprime mortgages, and that we were not in the same danger as the Americans. I’m not going to tell you that these statements were not accurate, it’s more: I’m going to challenge you to find in them something that was minimally true.
In Spain, there were subprime mortgages, but precious time was lost (and lost) until the problem was admitted ( and of course it was only done to blame others .) Maybe they did not exist with that official name and cataloging. As a securitized and resold debt wholesale in bulk, but there were subprime mortgages in Spain and many mortgages on real estate at astronomical prices, placed with clients with scarce economic resources, without a stable contract, or with a generous payroll … It hardly mattered for many managers of those easy checkbooks, and for those clients who believed that money was given to them because it grew on trees.
And of course, with the Spanish real estate depression, the tide went down, and the shame of those who thought they were rich without being, and also of those who wanted to get rich at the expense of sowing bank balances of uncollectible debts were left on the air. The double clamp of some debts that could not pay, a value of its floor to the downside, and a high probability (or in many cases certainty) of falling into unemployment, caused that for example many foreigners chose to return to their country and disregarding their debit obligations, opting for the braves for a forced dation in payment without (by then) legal coverage.
To this must be added all the assets seized to citizens who could not pay their debts, and that in addition to leaving thousands of families on the street, also contributed to rot the balance sheets of the bank with more overvalued floors. And this in a scenario that, for the bank, was similar to that of foreigners whose whereabouts were unknown: the bank kept a flat for which they paid less than the amount of the mortgage debt that it was intended to pay off . Come on, it was not the squaring of the circle: it was putting square wheels on the economy convoy.
Of those dust, those quagmires (banking and … family).
So the banks were gradually accumulating countless properties , many (very) outside prime areas of the cities, with unrealistic mortgage valuations, without a debtor to be able to be repaying their debts in a sustainable way (for both parties), with heavy burdens associated community fees and spills that had to continue paying as owners who had become, etc.
The bank balances were loaded with bricks, but with bricks that were often broken, and whose real estate and socio-economic pain can still be felt today. This is not to mention the situation in which those who took the worst part ended up : they stayed in the street and often with small children . But no, “In Spain there are no subprime mortgages”.
It is fascinating how sociologically a flock that goes to the slaughterhouse is able to let itself be grazed so happy towards its uncertain destiny, and it does so only with the pastor telling him the idyllic fantasies that he is wanting to hear . We are herd animals, and going where the dough goes we felt safe, although the dough is also wrong and sometimes go straight to the cliff.
And now the high-risk loans again make a furore on Wall Street
The Furor For High Risk Loans Goes Back To Wall Street We Do not Learn 1
As a few weeks ago published The New York Times , a close credit relative of the subprime is sweeping on Wall Street, to the point of being rated as the hottest investment product of the year (and so … hot reheated).
On this occasion, the so-called CLOs that are sweeping not only have in common to be so effervescent fashion, the parallel is also that these credit products are also being granted to high-risk customers. The perverse dynamics that the market is following millimeter follows what already happened ten years ago with the fateful subprime. And the requirements to grant the uncertain credit are being lowered, while the regulation is also relaxing. An explosive cocktail that does not doubt that, to follow its current trend, at some point it will end up living up to its name .
Even the name of CLO reminds sinisterly to be spelled to that of their subprime ancestors: they were the CDOs. Both products are based on the same mechanism exposed before debt bundling and resale in the markets . It is what is known as collateralized debt, or more appropriately “Financial Engineering” (with the engineers’ pardon) or “Banca in the shade” (or “Shadow Banking” in English).
Practically, the only difference between the CDOs of the subprime crisis and the current CLOs is that in the former the underlying credit was a mortgage loan, and in the case of the effervescent CLOs the underlying credit is corporate : that is, a company that asks borrowed without hardly offering guarantees of repayment of that debt.
And to get an idea of the figures that this dangerous financial trend is reaching, this type of loans to companies with “junk rating” in terms of credit (or in English “junk rating”) , last year already broke records to reach 550,000 million dollars , reaching levels that dwarf those who marked the terrible subprime mortgages. The significant qualification of “garbage” also comes with the aggravating circumstance that these companies already carry a heavy burden of previous debts, which only increases the probability of non-payment of the new issues even more.
To give you just one illustrative example that also quoted The New York Times in the previous link: Sears , the famous department store company that has recently entered into bankruptcy in the US, has been an active issuer of this type of corporate junk debt .