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Posted by: Robert Hutchinson This is not Wall Street's finest hour. It seems there was no end to the greed. The subprime bubble/bust, fraught with fraud, follows on the heels of another massive fraud, the dot.com bubble/bust. The losses seem to grow each day, with everyone wondering when the next shoe will drop. One set of figures put the losses at $170 billion for U.S. institutions and $200 billion for foreign investors. Goldman Sachs estimates the fallout could be as much as $1.2 trillion globally. There is no doubt that in many cases there was insufficient disclosure to investors who bought subprime instruments, including collateralized debt obligations (CDO's), collateralized mortgage obligations (CMO's), auction rate securities and the like, which can serve as a basis for recovery. Often this "disclosure" was piecemeal, uneven and incomplete, partly because there was a rush by many investment banks to "get out" product to an audience who wanted bigger and better returns. Exactly how these instruments were constructed, what their quality was, what sort of risk was involved, were not things that many investment banks understood (of course, some understood all these things and sold them anyway, without the requisite disclosure). Where the product was actually sold, several levels down from those who put the original deals together, the knowledge base eroded further, or put another way, those selling the product knew even less. Therefore, many did not and could not explain in any full and complete way, what they were selling and what the customer was buying. In many cases, the deal was permeated with undisclosed conflicts of interest. Sometimes written disclosure documents were not provided at all, particularly in the case of auction rate instruments, and in many other cases, the offering materials were materially deficient. The usual sales mantra was that the instruments were both safe and liquid. Investment banking firms have differing strategies to cope with the claims from investors they know will be coming. The turmoil among the investment banks themselves, and their varying degrees of losses, play a role in how they view the landscape and what they will do to navigate it. Some have a plan, and incredibly, some do not. Maybe it's not so incredible, given the fact that many investment banks have been busy attempting shore up their own balance sheets and raise capital after the staggering, grossly irresponsible losses they managed to incur. Their losses in subprime, and and the resulting loss of approximately two-thirds of their market value in the last 18 months (as of June 27, 2008) do not suggest great acumen or restraint: Name Stock Loss in Market Value * *Figures from the Wall Street Journal, June 27, 2008 Forced to raise the additional capital to cover their huge losses, many, including the likes of Citigroup, Merrill Lynch, UBS and Morgan Stanley resorted to going to foreign countries and their sovereign wealth funds, with hat in hand. |
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