You Should Be Furious

You may find these days depressing -- watching the value of your portfolio drain away, day after day, in this dismal market. But that's really the wrong way to look at things. You shouldn't be despondent. You should be furious.

Bear markets happen, but this bear market could have been easily prevented. We got here through rash speculation and atrocious judgment on the part of speculators, but guess who suffers? You. Your portfolio will take the hit, your savings will be ravaged by inflation, and your tax dollars will go toward cleaning up the mess.

Fingers are pointing all over the financial sector, but four groups are primarily responsible.

Real estate speculators
Real estate speculators are the most obvious target, and they include everyone from "investors" to subprime borrowers who just wanted a home -- basically, everyone who bought real estate but couldn't truly afford it.

And speculation was truly out of control. In the first quarter of 2006, 26% of loans were of the interest-only or negative amortization variety. For a small group of knowledgeable borrowers, loans such as these made sense. But for more than a quarter of the market? No way.

I've heard arguments that borrowers who couldn't afford their payments should be absolved of blame, since they're just victims of predatory lending. Yes, predatory lending definitely exists, but the bottom line is that it's the borrower's responsibility to understand the terms of the loan.

When you make the biggest purchase of your life, you should understand the terms of that purchase, even if you have to hire a lawyer to explain it to you. It really is that simple.

Mortgage originators
Of course, borrowers couldn't have assumed ridiculous loans without the help of mortgage originators such as Countrywide Financial (NYSE: CFC  ) , H&R Block (NYSE: HRB  ) , and Merrill Lynch's (NYSE: MER  ) First Franklin unit.

The statistics are damning. In 2005 and 2006, 20% of all mortgages were subprime, and a further 12% to 13% were low-documentation Alt-A loans. What's more, according to the National Association of Realtors, in 2005, the average first-time homebuyer made only a 2% down payment, a level that left no margin of safety for declining housing prices.

So a huge portion of the market consisted of high-risk loans. But why would conservative banks suddenly assume risks that they'd been avoiding up until then?

Ultimately, their necks weren't on the line, because they wouldn't keep the mortgages. Instead, they'd use investment banks such as Morgan Stanley (NYSE: MS  ) and Lehman Brothers (NYSE: LEH  ) to securitize mortgages. In other words, they'd dump these junk loans on pension funds, hedge funds, and anyone else desperate for high yields. Sure, the buyers would end up owning questionable debt, but by then, the originators were on to the next deal. No skin off their noses.

Rating agencies
But mortgage securitizations couldn't have gotten so out of hand without Moody's (NYSE: MCO  ) and other rating agencies giving asset-backed securities much higher ratings than they truly deserved and, thus, concealing the true risks.

Since 2006, hundreds of billions of dollars in securitizations have been downgraded to better describe the risks involved. For instance, in 2006, 76% of the Moody's-rated dollar volume of securitizations that were backed by subprime closed-end second-lien loans were downgraded after "materially significant underperformance."

Clearly, the original models the rating agencies used were horribly inaccurate. Though housing declines have been rare, at minimum the agencies should have considered this possibility before handing out AAA ratings. After all, when evaluating a company like Exxon Mobil (NYSE: XOM  ) , they wouldn't assume that oil is certain to remain above $50 a barrel -- even if it looks that way now.

The Fed
At the end of the day, Alan Greenspan's Federal Reserve holds a great deal of responsibility for this bust. All of the other players in this drama can claim, however feebly, that they were just trying to make money. The Fed, on the other hand, is responsible for acting in the best interests of this country and guarding against anything that might destabilize the system.

Instead, Greenspan kept interest rates low for way too long. He didn't recognize that the liquidity he pumped into the system was building a national housing bubble, even with prices up more than 70% in real terms over eight years.

It's baffling that the nation's chief economist could look at facts like this graph, see housing equity at record lows, and not think that something was seriously wrong. But Greenspan is also the guy who said that you can identify bubbles only after they pop and that there was "no evidence that home prices are going to collapse."

I expect more than blind optimism from the top economist in the United States, and so should you.

The best revenge
I'm incensed about what's happened. As an investor, though, I'm also able to see the one silver lining in this storm of incompetence, greed, and willful ignorance: astounding investment opportunities that you can find only during periods of turmoil.

In a calm market, it's difficult finding stocks trading at discounts of more than 35%. But now, though it's more challenging to separate the winners from the losers, there are substantial opportunities. Our Motley Fool Inside Value team has found a handful of stocks that we believe to be trading at 60% discounts to fair value, which implies a 150% return if these stocks simply appreciate to what we think they're worth. Now, those returns won't happen overnight, and some of those scenarios rely on having the economy pick up again over the next few years. But if you can have longer-term time horizon, there are some incredible opportunities out there today.

The best outlet for your fury is to take advantage of current conditions and profit from them down the line.

If you'd like to do just that, take a look at the stocks we're recommending at Inside Value free for 30 days. Click here for more information. There is no obligation to subscribe.

Fool contributor Richard Gibbons is miffed that the government chose Bernanke instead of him to clean up after Greenspan. He does not have a position in any of the stocks discussed in this article. Moody's is an Inside Value and Stock Advisor recommendation. The Fool disclosure policy's smoldering gaze will grab the attention of even the most icy Federal Reserve chairman.

Read/Post Comments (0) | Recommend This Article (130)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 606131, ~/Articles/ArticleHandler.aspx, 6/1/2016 12:16:27 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 3 hours ago Sponsored by:
DOW 17,787.20 -86.02 -0.48%
S&P 500 2,096.96 -2.10 -0.10%
NASD 4,948.06 14.55 0.29%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

6/30/2008 4:03 PM
CFC $4.25 Down +0.00 +0.00%
HRB $21.36 Up +0.39 +1.86%
H&R Block, Inc. CAPS Rating: ***
LEH $0.13 Down +0.00 +0.00%
Lehman Brothers Ho… CAPS Rating: *
MCO $98.64 Down -0.09 -0.09%
Moody's CAPS Rating: ****
MER.DL2 $11.64 Down +0.00 +0.00%
Merrill Lynch & Co… CAPS Rating: *
MS $27.37 Down -0.16 -0.58%
Morgan Stanley CAPS Rating: ***
XOM $89.02 Down -0.99 -1.10%
ExxonMobil Corp CAPS Rating: ****