Friday, July 20, 2007

Sub-Prime Mortgage Mess: Did It take a genius?

I'm often amazed at how really smart people can get caught up in the crowd, along with their friends and peers. Caught up in the Extraordinary Popular Delusions and Madness of Crowds, even really smart people have trouble rationalizing their behaviours later, in a way that doesn't sound like they themselves still haven't figured out what happened to them.

In this category then, perhaps I should apply for a job as the head of GE, or perhaps GE Capital, or perhaps as the GE Chief Financial Officer (CFO). GE has recently decided to exit the sub-prime mortgage business, due to its obvious problems and potential for more. In reading one account of the reason they were exiting, GE CFO Keith Sherin said this ...

"In the first quarter we said we were committed to the business and we were. Based on the changes we saw, we made the decision to exit the business. I think it was a smart move."

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Back in March 2006 (just after this blog started), I posted on the housing market and the potential for sub-prime loans to wreck havoc on the bottom line, suggesting that ...


"Having seen the tall-headed gnomes in my own financial field previously lend to extreme ratios in the dying days of a real estate upswing, I thought they'd have figured out that lending like that at the end of a long cycle, isn't very good for the bottom line. "

I guess if Keith Sherin didn't realize it wasn't a very good business to be in at the top of a real estate cycle (like about a year-and-half earlier, when they could have sold these assets for a lot more money, instead of taking a charge to get out of the business), then I'm a lot wiser than he is.
Hmmm, I wonder what the pay is in his job? Mr. Immelt let's talk stock options ... how many can I get?




JW

The Confused Capitalist

1 comment:

Eric J. Fox said...

Wall Street has no institutional memory at all. The "smart money" makes the same mistake over and over again. The product name may have changed but the damage gets done and the ultimate investor gets hurt.