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The Subprime Crisis -- Cause, Effect and Consequences

Time, Date, & Location

Date: Wednesday, March 19, 2008
Time: 4:30 p.m. -- 6:00 p.m.
Location: College of Business
Where: Indiana State University, Terre Haute, IN 47809

Event Details:

“Housing prices yet to hit bottom, analyst says”

Article by Arthur Foulkes, 812.231.4232, arthur.foulkes@tribstar.com

Terre Haute Tribune-Star, March 19, 2008 http://www.tribstar.com/archivesearch/local_story_079222340.html

Reprinted with permission

Housing prices may not hit bottom until next year, according to a financial analyst and risk management specialist speaking at Indiana State University on Wednesday night.
Chris Whalen, managing director of Institutional Risk Analytics, said the current subprime mortgage crisis could lead to “significant bank failures this year,” and he expects mortgage foreclosures to continue to rise.

“I think the U.S. economy is really going to take a hit,” Whalen said.

Speaking to a gathering of bankers, ISU faculty, financial services professionals and others, Whalen said the subprime crisis has three primary causes.

First, Whalen said, the subprime crisis has roots in government efforts to expand home ownership in the U.S. Although home ownership rates in the U.S. were already around 65 percent – greater than anywhere else in the world – this was not high enough for Washington, he said.

Legal and regulatory mandates, influenced by lobbyists from the home building and mortgage industries, pushed affordable housing to the point where banks were routinely offering innovative financing in the 1990s, Whalen said.

Second, Whalen blames “errors and omissions” committed by government regulators regarding banking policy. Regulators and economists at the Federal Reserve followed a faulty model of the subprime market based on the market for government-sponsored entities, such as Fannie Mae and Freddie Mac. This opened the door for Wall Street to capitalize on “regulatory arbitrage,” Whalen said.

Third, Whalen blames the Securities and Exchange Commission for requiring the use of “fair value accounting,” something Whalen calls hearsay.

Fair value accounting requires companies to record greater losses than they are actually suffering, harming investor confidence, he said. The recent failure of Bear Stearns & Co. would not have happened without fair value accounting, Whalen added.

The financial fallout from the subprime crisis could make it more difficult for people to receive fixed-rate home loans, said John W. Perry, senior vice president and trust officer at Terre Haute Savings Bank. “It has a fundamental impact on the economy,” Perry said.

Whalen, who said he believes Fannie Mae and Freddie Mac have forced private lenders to “go up the risk curve” in the loans they make, also believes the entire mortgage industry could be quickly privatized and made more transparent with proper legislation.

However, Whalen was not optimistic Washington will find any solutions soon.
“Unfortunately, most members of Congress don’t have a clue about this,” Whalen said. “Remember, when [politicians] offer you a solution, they caused the problem in the first place,” he said.

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About the Presenter:

R. Christopher Whalen is co-founder and managing director of Institutional Risk Analytics (www.institutionalriskanalytics.com) with responsibility for sales, marketing and business development. He has worked as an investment banker, research analyst and journalist for more than two decades.

After graduating from Villanova University in 1981, Mr. Whalen worked for the U.S. House of Representatives and then as a management trainee at the Federal Reserve Bank of New York, where he worked in the bank supervision and foreign exchange departments. He subsequently worked in the fixed income department of Bear, Stearns & Co, in London. After returning to the United States in 1988, he spent a decade providing risk management and loan workout services to multinational companies and government agencies operating in Latin America. Mr. Whalen’s clients included the Export-Import Bank of the US, Kroll Associates and Weyerhaeuser. During this period he served as an adviser to the presidential campaign of Cuauhtémoc Cardenas Solórzano.

In 1997, he returned to Wall Street, working as an investment banker in the mergers and acquisitions group of Bear, Stearns & Co. and later Prudential Securities where he focused on the technology sector. He then served as the managing director of The Free Internet Group Ltd., one of the largest independent Internet service providers in the United Kingdom. In 2001, Mr. Whalen returned to investment banking, working as a banker at Fechtor, Detwiler & Co. and an equity research analyst at Ramberg, Whalen & Co., following names such as IBM, Apple Computer, Hewlett-Packard and Cisco Systems.

In addition to editing the newsletter, The Institutional Risk Analyst, Mr. Whalen contributes regularly to publications such as Barron's, The International Economy and The American Banker. He has appeared before the US Congress and the Securities and Exchange Commission to testify on a variety of financial issues and speaks on topics such as XBRL, investing and corporate governance. Mr. Whalen volunteers as a member of the New York and Washington Steering Committees of Professional Risk Managers International Association and edits a blog on regulation and risk management on the www.primia.org web site. A complete list of Mr. Whalen’s published works is available on www.rcwhalen.com.