Wachovia board members have forced CEO Ken Thompson to retire and Realtors should be popping champagne corks all over the nation. Why? Because Wachovia is the final reckoning of the Gang of Three and this may very well signal the bottom of the market. Disclaimer #1: I usually write posts and comments backed by statistics. Barry Cunningham will attest to that. But this post is going to be more along the lines of a common sense case study; a thought experiment.
The Gang of Three
When the press first started reporting on the “sub-prime” crisis (a misnomer in itself, but we’ll save that for another day), a number of us were pointing out the real problems and what was to come. There were three lenders to worry about and Countrywide, by virtue of its size more than any particular wrong doing, was used as the example. In my weekly speeches to Realtors, I began to refer to them as The Gang of Three: Countrywide, WaMu and Wachovia. The initial problems at Countrywide can be seen as far back as May of last year. The set-asides at Countrywide were woefully inadequate, in my opinion, and that seems to have been borne out. WaMu went down the exact same path and now, finally, we see Wachovia doubling the losses they originally forecast. Why are these three lenders leading the Lemming parade off the financial cliff? What do all three lenders have in common? (Hint: it’s not sub-prime loans.) The common thread here is Negative Amortization Loans (cue ominous music). Disclaimer #2: I am on record as being VERY against Neg-Ams (I have never written one for a single client). Do they have a purpose? Yes. A few of my colleagues have used them effectively. But I would venture to guess 75% of the neg-am loans produced were at least a by-product of greed if not out right theft on the part of the originator.
There is not space here to go into why these loans are, generally speaking, so abused and that is not the point of this post. The point is that these are the big three originators of neg-ams (Countrywide, WaMu and Wachovia through their very questionable puchase of Golden West Financial) and all three Read more