Boomer’s Blog

On March 20, the blog discussed a recent article from Fortune magazine I think is essential reading for REI investors seeking build their businesses while so many others seem to be failing. The title of the story begs the question: “How bad is the mortgage crisis going to get?”

The answers from Princeton economist Paul Krugman are chilling, and they echo my sentiments that things are going to get much worse for the economy before they get better. Krugman has predicted that the crisis that began when subprime lending spiraled out of control, is likely to result in an average property value drop of 25 percent for homeowners. The domino-effect is expected to continue leveling markets — and the economy — until 2010.

Folks, I made some bold statements in Q4, 2007 that included my prediction that a major Wall Street firm other than Goldman Sacs would fail. At the time, I suggested that Bear Stearns, Merrill Lynch, UBS or Lehman Brothers were all prime candidates for disaster.

And as I write, the Wall Street Journal reports that Fed staff are literally on-site at Goldman Sachs Group Inc., Morgan Stanley, Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Bear Stearns, which consented to be sold to J.P. Morgan Chase in a deal brokered by the Fed in March.

Each of these brokerages has borrowed from the Fed since it opened its temporary lending program last month in hopes of preventing another Bear Stearns style bloodletting on Wall Street — and the fall-out that would likely permeate the greater economy. These efforts represent the first time that the Fed has supported loans to entities other than banks since the Great Depression. (For details on the Fed’s temporary program that was deployed in March to provide emergency cash to ailing security firms, see yesterday’s post: “Fed Defends Bear Loans, Supplies Cash Tourniquets.”)

The U.S. Senate wants answers about how all this turmoil has happened, and a bipartisan alliance has asked the General Accounting Office (GAO) office to review the SEC’s enforcement program.

All this leads me to believe that at least one more Wall Street monolith will hit the pavement this year. But that doesn’t mean that real estate investors have to hit the ground, too.

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