Subprime Delivers One-Two Punch
Just Like Hurricane Katrina Did
By Susan C. Walker,
Elliott Wave International
November 29, 2007
The world is awash in bad news about the subprime mortgage
meltdown, just the same way that New Orleans was awash in floodwaters from
Hurricane Katrina two summers ago. A few examples:
The median price for new home drops 13% since last year, the
most in 37 years, according to a Census Bureau report on November 29. This due
in large part to buyers not being able to get financing now that lenders have
tightened their lending standards in response to the subprime debacle.
Major Wall Street banks write off billions of dollars in
Dire forecasts estimate that the credit crunch caused by the
mortgage problems will cause between $250 billion to $500 billion of losses at
banks and brokerages before it's done.
If you want to see how this kind of news looks on a price chart,
consider the chart that we published in the latest Elliott Wave Financial
Forecast. It shows how confidence in the mortgage market has simply fallen
off a cliff. "The ABX Mortgage Indexes are akin to the eerie music that starts
to play right before the goriest scenes in a horror movie," write our analysts
Steve Hochberg and Pete Kendall. Even prime-rated mortgages (the top line on the
chart) seem to have been tainted by the cliff-diving exploits of the subprime
and Alt-A mortgage indexes.
Editor's note: Elliott Wave International
invites you to read more about this Mortgage Mutiny chart in a special
three-page excerpt from the November 2007 Elliott Wave Financial Forecast,
"Transition to a Fear of Risk."
The continuing repercussions of the subprime meltdown since two
Bear Stearns' hedge funds imploded in August remind me how closely this
situation imitates the delayed punch of Hurricane Katrina in the summer of 2005.
In fact, I wrote a column for Fox News on that very topic a few months ago, some
of which is worth repeating.
* * * * *
[Excerpted from "Subprime Storm Mimics Katrina," originally published July 30,
Wall Street may have reason to worry about a financial hurricane
poised to do the same kind of damage Hurricane Katrina did in terms of money
and assets lost in New Orleans in 2005. Given the latest storm warnings about
subprime mortgages and the Dows dive last week, it looks like "Subprime
Katrina" might become the financial storm of the decade.
Wall Street investment bankers who remember the devastation in
New Orleans might want to start battening down the hatches. In fact, some of
them seem to understand their pending doom as they try to cajole the rest of the
world into thinking that the subprime (otherwise known as low-quality) mortgage
contagion is contained. 'Sure, sure, Bear Stearns got hit when its subprime
hedge funds lost their value, but everyone else is O.K.,' they say. 'Let's all
heave one collective sigh of relief that we dodged that bullet.'
Does that attitude sound familiar? It's exactly how the people
of New Orleans felt for the 8-10 hours after Hurricane Katrina whipped up the
Gulf Coast and dumped its rain. It was over; they had dodged the bullet. Their
beautiful city that is built below sea level and surrounded by sea walls and
levees was safe. That's where Wall Street is right now hoping the levees will
hold as investment bankers try to sandbag the rest of us with lots of placating
talk. Well, it turns out that New Orleans was about as safe as the subprime
bonds that are now below their own "C" level.
Although Wall Street bankers have been doing one heckuva job, I
think it's too soon to breathe easy, just as it was too soon for those in the
Big Easy to breathe easy. Here's why: Wall Street was warned about the coming
hurricane-force fall-out from subprime mortgages, and it ignored the warnings,
buying up all the securities backed by subprime mortgages that it could. Now,
Wall Street is having trouble selling more debt. It sounds like it may be too
late for many Wall Street denizens to get out of town and their positions
before the floodwaters start rising.
Remember, too, the finger-pointing and blaming that started as
soon as the rest of the nation realized that the U.S. government was not doing
enough to help New Orleans? The editors of The Elliott Wave Financial
Forecast recognize a similar change in attitudes toward Wall Street:
"The unwinding process will be sped along by a flood of
revelations about illicit hedge fund and investment banking activities. Just
as Enron, Tyco and a host of other primary beneficiaries of the late 1990s
bull market run became the focus of scandals, hedge funds and the banks that
enabled them are starting to become a focal point for scrutiny." (The
Elliott Wave Financial Forecast, July 2007)
Then will come the final installment. Just as the U.S.
government was slow to come to grips with the disaster in New Orleans so that
people were left to fend for themselves, so too will investment bankers and
investors have to fend for themselves. They may find themselves clutching
their worthless paper and wishing someone would bail them out from the
rooftops of their now-worthless homes.
* * * * *
Now, here we are at the end of November, and the situation for
investors and investment banks has played out almost exactly as I outlined.
Hardly anyone is coming out smelling like a rose. If anything it's the opposite,
as the stench from quarterly financial filings rises as banks reveal how many
billions in dollars they must write off for their mortgage investments gone bad.
Sadly, the conclusion to my Subprime Katrina column still holds true: "Heckuva
Job Brownie now known as Helicopter Ben Bernanke and his Federal Reserve team
won't have any more luck picking up the pieces on Wall Street than FEMA did in
Susan C. Walker writes for
Elliott Wave International, a market forecasting and technical analysis
company. She has been an associate editor with Inc. magazine, a newspaper writer
and editor, an investor relations executive and a speechwriter for the Federal
Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.