Subprime Peer Pressure

What is it about sub-prime mortgages that has everyone so entranced? Like the proverbial deer caught in the headlights, financial professionals can’t seem to get out of the way of an oncoming car.

The latest news is the insurance industry. Analysts estimate that insurers will lose about 40 billion from investments in securities linked to substandard underwriting. That’s as big as the industry lost in the Katrina disaster.  And this disaster was self-inflicted.

Pundits are all looking for someone to blame, but the real culprit is the cyclical nature of markets. The longer times are good, the more people get comfortable taking risk. And when everyone is making money on the latest scheme, you begin to feel like a sap if you just stand on the sidelines and bellyache about risk.

Peer pressure doesn’t just affect teens. Financial professionals get sucked in too. But if all those kitchen-table discussions about risky behavior are ignored, eventually the chickens come home to roost.

Douglas R. Tengdin, CFA
Chief Investment Officer
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