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We Called For This Disaster in February 2007

Written By Brian Hicks

Posted October 21, 2008

Remember when?    

FDIC Chairman Sheila Barr said we’re in the 7th inning?

Richard Fuld told us the worse of the crisis is “behind us”? 

JP Morgan Chase’s Jamie Dimond believed the market debacle is “maybe 75 percent to 80 percent over”?

Merrill Lynch CEO said the subprime crisis was “reasonably well contained”?

Or even when Morgan Stanley CEO John Mack says the 8th inning… maybe even top of the 9th?

Truth is, not one of them knew what they were talking about.

We’re lucky if we’re even out of the 5th inning of a double-header.

In the latest chapter of America‘s financial tragedy – a foul tale of extreme greed that’s led to the widespread suffering of millions… banks have folded.  Jobs have been lost.  Consumers have stopped spending.  And the global community has suffered.

Fortunately, I’ve been warning readers of this impending crisis since February 2007. 

As soon as New Century Financial filed for bankruptcy, and plunged from $30 to less than $1 – a move that many of my readers profited handsomely from – the crisis began.

Oddly enough, though, very few people in corporate America or the government could see what was coming…  Not even Hank Paulson, who in 2007 said “we’re at or near bottom” for housing again… and again.

Even Bernanke should’ve seen the crisis coming.  Instead, he ignored what should have been obvious, saying:

“We have spent a bit of time evaluating the financial implications of the subprime issues, tried to assess the magnitude of losses, and tried to determine how concentrated they are,” said Bernanke in 2007.  “There is a sense that, although there is always a possibility for some kind of disruption …, the financial system will absorb the losses from the subprime mortgage problems without serious problems.” He also said he didn’t expect the subprime problems to have significant spillover to the rest of the economy.

But I wasn’t buying it, and wrote the following against Bernanke’s and Paulson falsities in February 2007.

Truth be told, when it comes to an “improving” housing market, do yourself a big favor. Ignore the mainstream press, and Wall Street hot shots that would have you believing in a housing bottom, or the illusion of priced in lending weakness.

We’re still not nearing a housing bottom, or an improving lending market.

Just ask companies like Lennar, KB Home, and DR Horton, who still don’t see this mythical housing bottom. Or, just ask Mortgage Lenders Network
USA, which just filed for Chapter 11 bankruptcy protection, becoming yet another casualty of the lending market in a slowing housing market.

As for the lending market, we were so bearish on the sector that we recommended that readers load up on New Century Financial (NEW) put options two days before the stock fell $14+. While readers already cashed out with 89% gains on the first half of the position, they’re still holding the second half, watching as the stock craters even more.

Truth… Subprime is Doomed…

Among the worst hit lenders are the sub prime lenders, or those companies that make loans to borrowers with less than perfect or poor credit histories. While subprime lenders charged higher interest (two or three points higher than prime lenders) as insurance for the higher risk the borrower represented, rising foreclosures have left the sub-prime industry facing substantial fallout risks.

Subprime lenders could offer adjustable or teaser rates to those with bad credit. Loans like this made up 23% of the
U.S. mortgage market in 2006 as compared to the 8% in 2001, according to Yahoo News. And it’s now a big problem as one in five sub-prime mortgages are now ending in foreclosure, according to the Center for Responsible Lending as mentioned by Yahoo News.

The Lending Market has not bottomed… nor has it priced in all negativity.

I’d love to sit here and jump on the bullish housing bandwagon that dominates Wall Street. Really, I would. But I’m not a fan of flushing my money down the toilet.

In reality, the housing market has not bottomed. Subprime lenders are doomed. You can continue to listen to the delusional madness pouring from the mouths of Street analysts, and the mainstream press, or you can listen to the homebuilder CEOs and the subprime lenders that have gone belly-up because of a weak housing market.

It’s your choice. But I’d go with the latter, though.

That’s just an inkling of the tumultuous future for subprime lending.

But one thing’s for certain – the worst is not over for subprime lenders, Alt-A, homebuilders, banks, retailers, consumers, and the global community.

I just can’t understand how they missed something so obvious.

Oh well. What’s done is done, right?  At least (once) trusted “depression expert” Bernake, Paulson, Wall Street, and government officials didn’t put Americans on the hook for hundreds of billions of dollars on their oversight… oh wait.