Nobody has a crystal ball, but some data now indicates that the worst may be over for the intense and devastating subprime loan crisis. If the end is near, it's welcome news for the entire financial world, because the subprime debacle has caused widespread tremors and shocks.
Anybody can hype the markets with upbeat news, but when respected pundits, such as those at Standard & Poor's, proclaim positive news, it's usually taken seriously. The corporate rating agency is one of the most informed and respected of all, and it recently reported optimism about the global financial sector and related subprime exposures.
Subprime turning point
The upbeat interpretation of data in mid-April immediately sparked a major rally on Wall Street. The S&P 500 climbed more than 1 percent on the news, and the Dow Jones Industrial Average ("Dow") rose from its precarious and significant 12,000 benchmark to end that day over 12,100. The Dow was again challenging 13,000, or was at least within arm's length of that goal if it dressed in platform shoes and stood atop a stepladder.
The Standard & Poor's numbers were rooted in calculations regarding so-called "write downs" of losses anticipated by financial institutions. These write-downs are not actual losses, but are predictions of loss potential. A company might expect to suffer future losses, for example, so it will write that damage into its financial projections. But if the reserves set aside to cover those losses turn out to be overestimated-if the valuations are too conservative and the losses eventually incurred are less than expected-the company will get a welcome surprise. Money in the bank can then be spent for investment, shareholder dividends, or other assets, rather than to compensate for subprime mortgage losses.
Standard & Poor's analysis basically revealed that, in their view, companies might have set aside more than necessary. This caused it to lower the threat level from the subprime fallout. This announcement and calmer reassessment of the situation caused the revelry on Wall Street and, for many investors, signaled a turning point in the subprime crisis.
Not everyone was sold on the idea. Many skeptics believe that Standard & Poor's, despite its legendary reputation, may be enjoying the benefit of 20/20 hindsight. While forecasting optimism, for example, the agency also raised its predictions of overall subprime losses by a substantial amount. As it stated that things were getting better, it simultaneously acknowledged that they were originally a whole lot worse. The rating agency also failed to predict the crisis in the first place, which doesn't exactly inspire confidence now, just two or three years later.
It's too soon to tell if we're out of the woods yet. At the point when your home equity swells, and banks offer easier mortgage money and extend the caps on home equity loans, then you can really jump and shout.