Subprime Fallout: Hitting execs where it hurts

Today's Financial News - Posted December 19, 2007

"Perhaps the investment community is finally discovering what my grandmother could have told you: don’t lend money to people who don’t pay back their creditors." – Stephanie Grimmett

by Stephanie Grimmett

Baltimore – (TFN) You know things are bad when CEOs are sacrificing their yearly bonuses.

In a fit of corporate maturity, the CEOs and other chief officers of Morgan Stanley (MS: NYSE) and Bear Sterns (BSC: NYSE) are reportedly giving up their cushy end-of-year bonuses.

Morgan Stanley CEO John Mack announced his monetary renunciation in the midst of his company’s dismal fourth quarter results. Afterall, there’s no reason why he shouldn’t get a little good press for his altruism, even if the move does ring a little flat against the company’s billions in subprime write-offs.

It’s hard to resist an urge to quote a Shakespearean tragedy when MS reports a $3.6 billion loss overall, Merrill Lynch replaces its CEO over a $7.9 billion write down and Bear Sterns announces its first loss ever for its fourth quarter. That’s an 84-year winning streak down the drain.

But Goldman Sachs (GS: NYSE) doesn’t have to worry about such troubles. The corporate investor has seen another year of record earnings. And its executives are waking up to million-dollar bonuses in their stockings on Christmas morning.

Morgan Stanley made a foolhardy gamble on the subprime mortgage industry this quarter. Betting the fallout was behind the industry, MS dug itself into mortgages, and took a $9.4 billion hit on the bet.

Morgan Stanley needs to restructure its investment strategy and admit, once and for all, that investing in mortgage-holders with bad credit, whether they be companies or individuals, is never a good idea, no matter what the market is doing.

Goldman Sachs never jumped on the subprime bandwagon. And it’s prospering, just like the rest of the kids could be if they’d checked their risk-levels with reality and decided not to put money on an already lame horse.

Perhaps the investment community is finally discovering what my grandmother could have told you: don’t lend money to people who don’t pay back their creditors. And if you do, consider it a donation, not a loan.

While we’re at it, maybe it’s time we revise the American dream. To distort one of my family’s favorite phrases (usually said about driving to a teenager), “credit is a privilege, not a right.”

Yes, it sucks not to be able to buy a car or a house. But it sucks worse to declare bankruptcy and watch them haul that car back to the dealership or slowly sell all of your belongings to strangers.

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