Ahem. Don’t look know but it looks like the subprime infection is a little deeper at Wachovia and Bank of America than previously known. Still too early to panic, but this is going to take most of 2008 to fix and the local economy may feel it.
First up we have former Charlotte Business Journal reporter David Mildenburg shifting through Wachovia’s $1.1 billion loss on subprime mortgages. And that was just for last month as Mildenburg explains in this dispatch for Bloomberg. As we suspected some weeks ago, Wachovia will continue to have exposure in this area due to its Golden West buy-in into the sinking California real estate market.
Then there is Rick Rothacker’s very patient and clear piece on how banks like Wachovia and Bank of America essentially took the subprime business on and used it to secure and off-set their corporate lending business. It took the Uptown paper of record too long to get on this important story but more of these in-depth stories will make up for it.
Tremendously oversimplifed, the banks acted like they were merely making change — 4 quarters for $1 — in these transactions when in reality the value of their subprime holdings was tremendously sketchy and wound up falling through the floor.
Things get really interesting however, when you consider that had these transactions been considered outright loans federal capital requirements would have kicked in, mandating that the banks set aside higher levels of reserves in order to match the increased lending risk.
That did not happen. Hence there is no money. Well, that is not exactly correct.
There is some guy named John Q. Taxpayer that the bankers, the Fed, and politicians are trying to track down.
As analyst Chris Whalen explained there is no such thing as “off-balance sheet” transactions for banks — or anyone else. Someone always pays in the end.
Bend over, America.
