Trendwatch: Analysts must feel like gods

For all the yelling about who got greedy and who didn't regulate who well enough and who should have seen it all coming, at the end of the day this business continues to be operated in a manner designed to make investors feel happy.

It may not have been that way when a loan committee sat down at the table in the community S&L to decide whether to give farmer Peterson a new home equity second to cover the cost of next years feed and seed, but as soon as you started bundling up pools of loans into securities and selling them (along with publicly-traded shares of company stock) off to folks who don't know a mortgage loan from a sandy loam it became about meeting investor expectations. And if there's one thing investors expect, it's not to be afraid they might lose their money.

That makes it easy for guys in suits who spit out terms like credit shock and liquidity crisis to suck nearly 9% of the equity out of a publicly-traded company in one day. Some executive teams have to work all year to lose that much money. Not to mention the fact that some lenders haven't been impacted by credit shocks or suffered from liquidity problems yet. Never mind. It could happen. Believe me, you don't want to be the only analyst that wasn't shouting a warning from the rooftops if it all goes to hell.

Of course, if you're an investor it's your job to listen to analysts and take action on what they say just a little faster than the next guy. You don't have time to figure out the difference between subprime and Alt-A or Jumbo. Nonconforming says it all. That's why investors in American Home were able to abandon the company completely before defaults or delinquency had even made a noticeable dent, taking away 7000 jobs in less than a week.

I know that lenders will ultimately be blamed for the mortgage meltdown, but in the meantime, it must be a heady experience being an analyst.

Comments

Anonymous said…
Rick, dynamite post - esp. given what's taken place with Thornburg since you wrote it. I've link to this post this morning.
Anonymous said…
Still my favorite post of the month, anywhere.

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