Here's our tally of institutions, individuals and sectors who in their holiday prayers probably begged for better luck in 2008.
The Mortgage Origination Industry and Everyone Who Works in It
The Mortgage Bankers Association estimates that total U.S. mortgage production shrank 15 percent this year, reflecting the 24 percent plunge in reported sales of new homes and a 19 percent plunge in sales of existing homes. The mortgage broker community - an easy target because so many skills-free and ethics-free individuals flocked there in search of an easy buck, as happens during bubbles - is the most obvious casualty. But direct lenders are suffering almost as much, especially those who bet the farm on sub-prime, alt-A and other non-traditional mortgage products. These institutions run the gamut from Main Street's Countrywide to Wall Street's Bear Stearns to Japan's Mizuho. This is the area that's seen the largest number of layoffs and business closures, with more of the same expected in 2008.
Mortgaged-Backed and Other Asset-Backed Securities, and Financial Derivatives Based on Them
A half-trillion-dollar financial mess (that's the high-end estimate for the full cost of the sub-prime collapse) is worth at least two places on the losers' list this year, even if the two are so closely aligned they seem repetitive. This market, a step removed from the preceding entry, was the air duct that swooshed the anthrax spores of unsound and sometimes fraudulent mortgage loans into the lungs of Wall Street and the global banking system. As a result, almost overnight, mortgage-related structured finance professionals awoke to find themselves recast from heroes to goats. Now many of them are becoming refugees, as banks take an ax to the very desks that were their fastest growers and their biggest profit-makers a year ago, but which are now causing multi-billion dollar write-downs.
Not only might he lose his job running Bear Stearns, he's been publicly humiliated and forced to issue a denial that he smoked pot in a semi-public setting (the bathroom at a bridge tournament). Maybe worst of all, his personal equity stake in Bear Stearns has lost $600 million, close to 50 percent of its peak value. That takes some of the frosting off his distinction of becoming the first Wall Street chief executive to own $1 billion of his own firm's stock.
Whatever happened to Swiss diplomacy and discretion? Throughout 2007, it was musical chairs in the C-suite at this emblem of Old Europe banking tradition. They dumped a CEO, a CFO, and a global head of investment banking. All these unseemly spectacles were staged out in the open, without the customary fig leaves about executives leaving to pursue presumably better opportunities or spend more time with their families. And, just weeks after losing one star dealmaker (Ken Moelis), UBS shuttered a two-year old hedge fund it had created to keep another top dealmaker (John Costas) from jumping ship. Finally, the firm ended 2007 resolving to cap the cash portion of all bonuses at $750,000 and pay the rest in shares - a move expected to attract many copycats.
The Blackstone Group's initial public offering made his ownership stake bankable, but his luster faded when its share price soon sank from a high of $38 to the low '20s - well below its $31 IPO price. His lavish parties also made him a poster-boy for legislators seeking grass-roots support for soak-the-rich tax reform schemes that would have withdrawn favorable capital-gains treatment from private equity profits. Although the tax threat appears to have receded, and private equity remains a coveted career goal for many an ambitious financier, growth prospects for the highly leveraged mega-deals that are Blackstone's stock in trade have dimmed as banks turn skittish about lending to risky borrowers.
The Money Markets
When a hurricane rages, even the safest havens have a way of blowing apart. Managing cash has suddenly become "interesting," in the sense of the old Chinese curse, "May you live in the most interesting of times." Yes, the returns available from investing in very short-term instruments of various types have become juicier. But a cash manager's job normally isn't to make money, it's to not lose any - and with most asset-backed commercial paper under a cloud and credit concerns rippling throughout the broad financial sector and beyond, that is suddenly a challenge.
Sleeper Pick for 2008: The U.S. Consumer
They've held up surprisingly well this year even as home values rolled over. Whether that can continue is the big question mark for 2008. New job creation holds the key to continued consumer confidence and spending, and the latter will determine whether the economy sinks into recession next year.
Please note that we deliberately omitted Citigroup and Merrill Lynch and their respective ex-CEOs. With the changing of the guard, we feel that both institutions should now be judged by their future, not their recent past. And since the two dismissed leaders are no longer part of the industry (for now at least), we see little purpose in awarding them one of the coveted spots on this past year's losers' list.
If you think we're off-base or missed anyone else crucial, add your comments below.