Subprime over a bottle of beer

When a drinking buddy sends over a "Primer on Subprime" that means he doesn't only drink beer, he also has a taste for what goes with it. It's been a long time since we got each other a mug to while-away about pedestrian stuff and the infinite humor concerning her erstwhile landlady whom we shall fictionalize here as Peralucci Peragamo and from whence we also derive wisdom out of her financial sophistry and own version of enterprise greed being the "boardinghouse queen" of Kamagayan.   

I would have wanted to boldly print his real name here to return the kindness of what he just sent out for today's issue but "Mr. Bee" (not his real name) insisted to rather take comfort behind Peralucci's skirt and look forward instead to this column early this morning. I know Mr. Bee so well that I am just as aware how he guzzles his Financial Accounting (being a non-accountant at that) like alcohol better than any workaholic CPA around. He doesn't usually send stuff like this, but he's been acting like a god lately that if I refused to write about the primer, he shall send forth a curse to turn my beer into blood. And if I did exactly as told, he shall turn it into wine by the "power of his salary."

Levity aside, the primer tackles the whole dynamics of subprime in a comic strip. It has a lot of cuss though, but surprisingly worth the read, not to mention the fun, for laypeople like us. If you want a copy, just shoot me an email. The primer deals with the connection of the present financial crisis beginning with how mortgage companies lure Americans into real estate loans (at interest rates higher than low-risk or "A" loans a.k.a. prime loans) even those without the money to pay for it. This type of borrower is called a subprime with a credit rating of "C" or high-risk.

Subprime loans or Cs are then "laundered" together with A-rated loans to become, for example, one package of B-rated loan portfolio. With the new packaging, it is offered to local and offshore markets such as banks, stock exchanges, insurance and pension companies plus the assumed potential returns from rising prices of real estate and a booming US economy that chances of defaults were believed to be just another drunken fear. And to further reassure investors, the package is then covered by insurance or "Credit Default Swaps" (CDS) in case of default or non-payment. Incidentally, AIG happens to be the largest CDS participant in the world.     

And like many other failed prophecies, the much-awaited manna didn't fall as foretold. In late 2006, the defaults went out of control that it was impossible for insurers like AIG to shell out for the massive foreclosures and the maturing obligations on securitized subprime loans. In short, the whole subprime markets just crumbled like sandcastles with more than a hundred notable lenders to file for bankruptcy. Today, mortgage companies, banks, securities investors and insurers from all over the world who were exposed to such exotic investments are now scratching their heads if they ever get to recover their money with the real estate bubble at hand and solvency issues facing financial institutions.

Many observers fault the lack of transparency and the unabated malpractices in the entire mortgage chain which Mr. Bee describes as "the connivance of Chief Embezzlement Officers (CEOs) with their Chief Fraud Officers (CFOs)" to dupe the global investing public past the Federal Reserve's lack of oversight as well.

I tend to differ a bit that I look at the crisis to be one that is a product of excessive consumerism in which the famous artist Benjamin Nicholson paints it as "The corruption of the American soul." The average American lives above his means as if all it takes to enjoy life is not by how much beer he can buy but by how many beers he can owe. Thus to keep the everyday Joe in high spirits, he has to borrow beer next corner to pay the beer he owed from the bar he frequents to. And that's exactly what those spam mails about debt consolidation or debt-refinancing are for. 

In addition, Americans don't have savings that when things go wrong, they borrow. In 2006, the Department of Commerce said that the nation's personal savings rate for the period was negative one percent! And for that reason, the average American was not only less likely to spare some money for their subprime mortgages but it was, in reality, impossible to do so!

The crisis may be bad and should take a little while to settle. But it brings a very strong lesson to the average American and to overspending consumers worldwide that we need to sober up. We're already downright addicted to more beer than what God owns and that the whole point to all these ribbings is to drink moderately so we can loosen our pants. Cheers!  

Send emails to [email protected]