The Anxious Investor by Scott Nations

Author:Scott Nations
Language: eng
Format: epub
Publisher: HarperCollins
Published: 2022-02-11T00:00:00+00:00

The S&P ended 2007 with just a 3.5 percent return having given back much of the gain it had enjoyed as recently as October. But the market was lucky to hang on to even that small gain. During the week before Christmas, the investment bank Morgan Stanley told the world that it had lost $3.6 billion dollars in the previous quarter, due entirely to a write-down of $9.4 billion in the value of mortgage assets it owned. It was the first time Morgan Stanley had posted a quarterly loss in years, going back to before the bursting of the internet bubble. The only good news as the year hobbled to a close came from Merrill Lynch which announced on Christmas day that it had raised more than $6 billion in new capital from foreign investors.

In a harbinger of what was to come, the S&P lost 1.4 percent on the first trading day of 2008. Not once would the index close in positive territory for the year. However, even before the market closed that day there was bad news. Merrill Lynch announced that it had been forced to give a $50 million discount on two life insurance companies it was selling to a Dutch company. It was selling the companies to free up $800 million in capital at a time when other parts of Merrill were committing to buy the entire output of the Indonesian coal mine it had acquired the previous year. On the same day, it was reported that Merrill, despite having raised all that money the preceding week, was in talks with sovereign wealth funds in the Middle East and China for another giant infusion of cash. There would be new reports that Merrill was trying to raise $925 million from a bank in Japan before the week was out.

It wouldn’t be nearly enough because on January 17 Merrill announced its results for the fourth quarter of 2007. It was a net loss of $9.8 billion thanks to $16.7 billion in write-downs on the value of mortgages it held. Merrill’s new CEO, John Thain, called the results “unacceptable” in the epitome of understatement. Soon Merrill would announce it had raised another $5 billion from funds in Korea and Kuwait. The company had raised a total of $12.8 billion but that didn’t yet make up for the losses of $16.7 billion it had admitted to on its subprime mortgages—mortgages it couldn’t unload at any price. Total subprime-related losses for all global banks now exceeded $100 billion, and it was still the first month of 2008.

It became a race for all the investment banks. They had to raise additional capital and they had to face up to the losses they were incurring on the subprime mortgages they owned. It had been easy for the banks to bundle mortgages and sell them when other interest rates were low because the bundles offered a few extra percentage points of yield; everyone had wanted them. Now the banks were stuck with what had been in their pipelines and previous buyers wanted to sell what they already owned.

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