It started as a “subprime” problem, Wall Street told us. Consumers who didn’t really qualify for mortgages to buy homes were doing so anyway thanks to ingenious new mortgage instruments like “non-paper confirmation of income” home loan applications and ARMs that made payments for the first couple of years so low almost everyone qualified.
Then we were told the subprime mess might be a bit bigger than was first thought. People seeking higher rates of return on their money were sold pieces of pools of mortgages that were really a bunch of subprime mortgages combined into one big fund.
Merrill Lynch & Co., Inc. (NYSE/MER), the world’s largest stock brokerage, was the first big financial institution to come out and report it had exposure to the “credit crisis” in the financial markets stemming from subprime mortgages. Merrill announced it needs to write down $8.0 billion of its investments. The company then fired its leader, Stan O’Neal.
Now we hear the subprime mess is claiming banks as its next victims. Late last week, Citigroup, Inc. (NYSE/C), the largest U.S. bank, announced that it would take a hit of between $8.0 billion and $11.0 billion on its securities. Citigroup’s CEO, Chuck Prince, has stepped down. Monday, Citigroup stock fell five percent in one single day.
Remember when Greenspan was telling investors that the slowdown in the housing market would not affect the economy? Remember when Wall Street was telling us the subprime problem was isolated to risky investments? I didn’t know Merrill Lynch and Citigroup stock were so risky. Now we have Citigroup issuing a statement saying “…significant uncertainty continues to prevail in the financial markets.”
As I wrote three years ago, the construction industry is the backbone of the U.S. economy… always has been. We can’t have a slowdown in housing without the remainder of the U.S. economy not feeling it big-time. But the problems from the housing bust are only now starting to affect other parts of the economy. I’d stay clear of the big financial stocks, including the banks, as much as I’d stay clear of the new housing stocks.