When Banks and Investment Houses Dump Bad Assets

Barry Ritholtz over at The Big Picture has a good insight into the new guy at Bear Stearns.  Last summer he anticipated a change in senior management and said this:

“Just wait until Jimmy Cayne gets
dinged out of Bear Stearns. The new CEO will look at all the junk on
the books – problems he had nothing whatsoever to do with – and likely
say ‘Get all this shit off of my books. All of it. I don’t care
what it cost, I don’t care what its worth, I want all this garbage
outta here.’ ”

I tend to be a rational markets kind of guy, but Barry has the right tone for a senior executive.  Banks and investment houses will, indeed, sell far too cheaply just to get rid of the problem.  Remember the commercial lending crisis back in the early 1990s?  The bank I worked for went to customers who had never missed a payment and offered to accept 90 cents on the dollar as full payment–if they would just get their real estate loans off our balance sheet.

Bottom fishing time in the subprime market?  It’s tempting, but I’d want to run some very exhaustive foreclosure simulations first to be sure I understood the value of what I was buying.  Valuing modern mortgage-backed computers is not something you do on your old HP calculator.