'Subprime' is the word of the year
Posted
Jan 07 2008, 02:18 PM
by
Matt Koppenheffer
Rating:
No, seriously, the American Dialect Society annually anoints one word as the word of the year based on a vote from the members of the organization, and "subprime" took the trophy this year. The ADS defined subprime as "an adjective used to describe a risky or less than ideal loan, mortgage, or investment."
Professor Wayne Glowka, a member of the society, was quoted as saying: "When you have investment companies losing billions of dollars over something like bundled subprime loans, then you have to consider whether it's important." Amen to that!
It's hard to disagree with the choice -- subprime, which was mainly a word of bankers prior to this year, has been on the tip of nearly everyone's tongue. The whole fiasco has been a cascading mess of subprime lenders going bankrupt, homebuilders and broad-line mortgage lenders tanking, and investment banks writing off billions in bad securities.
The question this raises for me is whether pessimism over the situation will start to outrun the actual problems. Remember back in 1999 when taxi drivers were talking about Internet stocks? In retrospect that was a pretty good signal of the peak of optimism. So how about when we start to hear anyone and everyone talking about subprime?
As I browse the landscape on CAPS, it doesn't look like investors are starting to change their opinions very much. US homebuilders like KB Home and NVR are still largely carrying one star ratings and investment banks such as Bear Stearns and Citigroup aren't faring much better. And Countrywide Financial, the largest home lender, is still the subject of a lot of pessimism, including many that still think it could go bankrupt.
I don't pretend to have a timeline for how long the current storm cloud will last, but it will pass at some point, and likely reveal that pessimism went too far in some places. For now, though, subprime is the word of the year and everybody is holding their breath to see how deep the rabbit hole runs.
(Full disclosure: I do not have a financial position in any of the companies mentioned.)