Let's see, over the last 20 years the financial-services peddlers have given us junk bonds, derivative securities, the commercial real estate and tech-stock bubbles and now the subprime mortgage meltdown, to name just a few.
Each of these represented good niche products and investment strategies that made sense -- at first.
"But every time, every problem that I've seen has been because Wall Street found a way to take something to excess," said Ben Crabtree, the veteran local bank analyst with Stifel Nicolaus. "This is nothing new. But this time it's mortgages. And it is felt broadly by so many people."
This Wall Street crisis has literally hit home.
Over the weekend, the Federal Reserve orchestrated the $2-per-share stock sale of Bear Stearns Companies to J.P. Morgan Chase & Co. Bear Stearns, where former CEO James Cayne bagged $40 million in 2006 compensation, was one of the leading players in the subprime mortgage market.
Bear Stearns shareholders have seen the stock price fall from $170 per share last year. Many employees will lose jobs. They sure don't feel "bailed out" by the government.
But the Fed will essentially guarantee $30 billion of Bear Stearns most-illiquid investments.
And federal regulators have plainly said they will supply the cheap funds necessary to avoid a Wall Street meltdown. The Fed credit -- akin to the Fed's emergency lending "discount window" for banks -- will now allow the biggest investment banks access to this source of short-term cash.
Amid warnings that started early last year, the likes of Bear Stearns, Merrill Lynch, UBS, Citigroup and others kept gorging on subprime mortgage securities, financing related hedge funds for affluent investors -- some of which have imploded -- while assuring investors and the public that everything was under control.
Greed and fear
It's unclear what strings will be attached to the life rafts tossed by regulators. And several local brokerage officials declined to return calls yesterday to comment.
"Wall Street is out of our regulatory realm," said Glenn Wilson, the Minnesota commerce commissioner, who spent 30 years with local banking and mortgage companies before becoming a regulator in 2003. "You have to assume people with that kind of money are investing it wisely, but about every 10 years they go nuts."
Wall Street is driven by greed and fear. Both have been on ample display.
Investment bankers scooped up "nothing-down," "interest-only," "no-documentation" and other alternative mortgages, which grew to 20 percent of the mortgage market by 2006. Then they underwrote and peddled them to institutional investors as mortgage-backed securities. The high failure rates of these mortgage holders and loss of investor confidence has made these packages of loans "illiquid" or unsalable at the moment, forcing investors to take huge write-downs and related losses.
In recent months, nervous banks tightened credit, housing values have fallen steeply, business and consumer spending has slowed and we are now most likely in a job-losing recession.
The number of licensed Minnesota mortgage brokers has fallen from 4,000 to 1,200 over the last two years. Some of the fattest brokerage fees were paid on the worst products for consumers. The Commerce Department has brought civil and criminal charges against some brokers and is investigating others.
"It's a great time to buy a house," quipped Julie Gugin, executive director of the Minnesota Home Ownership Center on St. Paul's West Side.
The nonprofit agency, funded by community banks, was started 15 years ago to help first-time home buyers understand how to qualify for a mortgage, to ensure they can make the payments, maintain a reserve and manage a household. That's how it's supposed to work.
This year, thanks to some emergency state funding and additional counselors, Gugin's staff expects to counsel up to 27,000 families, three times the number in 2007. And most of them are trying to avoid foreclosure.
"The vast majority of what our counselors see are some sort of subprime or alternative mortgages that the buyer didn't fully understand and now they are near or in foreclosure," Gugin said. "We try to help them work out new terms with the lenders."
In some cases, the mortgage brokers preyed on dumb consumers. In some cases, it was fraud.
This is partly the fault of greedy consumers who borrowed too much, maybe added a second mortgage, and then went underwater after the teaser interest rates started ratcheting upward and home values eroded.
The result has been vacant houses, frantic families and pockmarked neighborhoods.
"The solution is education, education, education," Gugin said of knowledgeable buyers entering into reasonable transactions.
What we're witnessing is the disastrous collision of greed, fear and ignorance at the intersection of Wall Street and Main Street. Some banking kingpins got rich peddling junk. In a just world, they'd be sentenced to building Habitat homes for eternity.
Cleaning up the balance sheets of troubled lenders will be the easy part. Its going to take years to clean up the damage done to families and communities.
Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com