The Law Planet Blog

As a securities litigation lawyer, I often wonder what is the next "big thing" going to be. It's never a matter of "if", but only a matter of "when." We have now been handed the "what" which is the subprime credit markets. An article in Investment News reported that Bank of America is closing its Strategic Cash Fund after its assets dropped from $40 billion to $12 billion. While not specifically mentioned in the article, it is common knowledge that the uneasiness in the corporate credit markets stems from the so-called "Subprime Crisis."

What is this "Subprime Crisis" anyway? Subprime borrowers were high risk - paying higher interest rates than standard risk borrowers. These are the "junk bonds" for the new era. Suddenly, people are surprised that these high risk borrowers, some of whom were speculating, others of whom were simply over-extended, could not afford to pay. And suddenly basic economics takes over.

Houses go on sale for lower prices because of the supply. The questionable buyers can't step up and buy these houses, so there are fewer qualified buyers in a market filled with lightly used houses. Of course, most these qualified buyers have houses of their own, so they may not even be interested in moving. And, ultimately, the market finds a new level. Which economics genius thought that housing prices were going to continue skyward?

All of these defaults, of course, brought down the value of the securities issued to finance the borrowing. And that caused the subprime market to swirl around the bowl for a while, finding its own level, but taking a number of purportedly sophisticated players with it. And now we have the average, and not-so-average, retail investor who put there money in these subprime instruments claiming that they were unsuitable. Maybe they were, maybe they weren't. One thing's for sure. It looks like we found the next "big thing."

That's the view from The Law Planet - Jupiter, Florida.