Subprime & CDO Meltdown Worse than RTC/S&L Crisis

There is a new study out that has compared the current mortgage and subprime meltdown to the S&L and consumer crisis of the 1980’s that led to the creation of Resolution Trust Corp. (the "RTC").  The results are not promising for any optimists other than those named Pangloss.

Navigant Consulting, Inc. provides business, regulatory and financial advisory services and it has released a study showing that the number of subprime-related cases filed in federal courts is already out-pacing the S&L crisis litigation in the early 1990’s.  This study noted that that subprime cases in 2007 already equaled half of the total 559 S&L cases handled by the RTC over a multi-year period, although this is only measuring federal court cases filed.  This notes that of the 278 cases filed in 2007 some 43% came from borrower class action suits, 22% came from securities cases, and 22% came from commercial contract disputes.

a673b.bigscoots-temp.com would note that these only represent the cases for 2007.  The cases in 2008 are likely to dwarf the 2007 cases since these take time to file and much of the pending damages have either not yet happened or have not been able to be quantified.  The real damages and issues in 2007 were also not until the second half of the year.

We haven’t even seen all of the counterparty blow-ups come to pass yet.  We have yet to see any of the major financial institutions fail, and all of the bond insurers are still surviving.  Warren Buffett will only save entities that make financial sense.  We believe that the headlines coming are only going to get worse before they get better.  Stocks will continue to act on their own, and when these financial stocks do ultimately turn it will be long before we start seeing actual good headlines.  There is a reason we noted that financial mergers may become mandated rather than preferred.

Ultimately things will get better.  But there is much more pain to come.

Jon C. Ogg
February 14, 2008