Analyst Susan Troll spotted problems in the subprime credit market early.
What tipped you off to the problems in the subprime market?
There were a lot of red flags. Underwriters dramatically lowered standards while lenders struggled to maintain loan volume and market share. The bonds backing those loans were clearly deteriorating in credit quality, but every deal that came to market was priced at a richer level. There was tremendous growth in the subprime credit markets, but the markets were still relatively new. So, many participants relied on models using historical data. But the securities had never been tested during stressed economic environments. It made me feel as if the whole thing was a house of cards.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Have we overreacted?
I don't believe so. The subprime market was so irrational that a huge correction was absolutely necessary. But what surprised me was the speed and severity of the downturn. The collapse has spread through the entire asset-backed bond market -- good bonds and bad. The market remains very dislocated.
What happens next?
We're only about halfway through this mess. There will be further write-downs and further declines for these securities. A large number of loans will reset this year. At the same time, a number of refinancing options have disappeared. Until home prices bottom out, maybe another 10% to 15% from here, it's hard to value these securities. And subprime lending as we know it is history. That market won't come back. Lenders will go back to good old lending standards -- 20% down payments, documentation of income.
Sidestepping the crisis must have done a lot for your firm's fixed-income funds.
Our New Income fund ranked 22 out of 172 similar funds in 2007, returning 6.3%, versus 4.5% for the average fund. The most telling stat is the return for the worst fund in the group -- down 7.9%. I can guarantee that that fund was holding a lot of subprime.
Why was it so hard for others to see the risks?
Some people saw this coming. But it's hard to pull back from a market that's booming. Many people searching for yield felt pressure to buy securities they didn't understand. Bottom line: If you can't explain it, don't buy it. That's just common sense.
-
Dow Adds 646 Points, Hits New Highs: Stock Market TodayIt was "boom" for the Dow but "bust" for the Nasdaq following a December Fed meeting that was less hawkish than expected.
-
5 Types of Gifts the IRS Won’t Tax: Even If They’re BigGift Tax Several categories of gifts don’t count toward annual gift tax limits. Here's what you need to know.
-
The 'Scrooge' Strategy: How to Turn Your Old Junk Into a Tax DeductionTax Deductions We break down the IRS rules for non-cash charitable contributions. Plus, here's a handy checklist before you donate to charity this year.
-
Amazon Resale: Where Amazon Prime Returns Become Your Online BargainsFeature Amazon Resale products may have some imperfections, but that often leads to wildly discounted prices.
-
Roth IRA Contribution Limits for 2026Roth IRAs Roth IRAs allow you to save for retirement with after-tax dollars while you're working, and then withdraw those contributions and earnings tax-free when you retire. Here's a look at 2026 limits and income-based phaseouts.
-
How to Search For Foreclosures Near You: Best Websites for ListingsMaking Your Money Last Searching for a foreclosed home? These top-rated foreclosure websites — including free, paid and government options — can help you find listings near you.
-
Luxury Home Prices Rise as the Rich Dodge High Mortgage RatesLuxury home prices rose 9% to the highest third-quarter level on record, Redfin reports, growing nearly three times faster than non-luxury prices.
-
Four Tips for Renting Out Your Home on Airbnbreal estate Here's what you should know before listing your home on Airbnb.
-
Five Ways to a Cheap Last-Minute VacationTravel It is possible to pull off a cheap last-minute vacation. Here are some tips to make it happen.
-
How Much Life Insurance Do You Need?insurance When assessing how much life insurance you need, take a systematic approach instead of relying on rules of thumb.
-
When Does Amazon Prime Day End in October? Everything We Know, Plus the Best Deals on Samsonite, Samsung and MoreAmazon Prime The Amazon Prime Big Deal Days sale ends soon. Here are the key details you need to know, plus some of our favorite deals members can shop before it's over.
