Most Important of 2007
Some years seem longer than most. For many, 2007 may seem like one of the longest on record—especially if you are a homeowner, an American tourist in Europe, an SUV driver, or a Wall Street CEO.
That's because 2007 put an official end to the easy-money party that has driven the U.S. economy over the past few years. As many people feared it would, the housing bubble popped as millions of subprime adjustable-rate mortgages reset to higher rates, with the unsurprising result that many homeowners found they could no longer afford their monthly payments. Not only that, but they also found no one wanted to buy their homes because rates were climbing and property prices were falling. The inescapable result was that millions of homeowners began facing foreclosure and the banks that had loaned out the money saw the value of their mortgage portfolios tank (BusinessWeek.com, 3/2/07).
Soon, it became apparent the losses on failed mortgages would be in the billions, if not trillions (BusinessWeek.com, 11/19/07).
First, Bear Stearns (BSC) warned last June that two of its hedge funds had taken significant hits (BusinessWeek.com, 6/12/07). These were dwarfed in October when Merrill Lynch (MER) announced it would be writing down nearly $8 billion (BusinessWeek.com, 10/23/07) as a result of bad bets in the mortgage market, which led to the defenestration of its chief, Stanley O'Neal.
Then, on Nov. 4, Citigroup's (C) embattled CEO Charles Prince resigned (BusinessWeek.com, 11/5/07) shortly after disclosing the company's losses in the credit markets might reach $17 billion—nearly three times more than the company estimated in October.
The most recent high-profile victim of bad mortgage bets is Morgan Stanley's (MS) co-President Zoe Cruz, a 25-year veteran of the company and long considered one of the most powerful women on Wall Street. She was terminated on Nov. 30 after the bank suffered $3.7 billion of subprime mortgage-related losses in September and October.
The subprime fallout just keeps rolling—and the reality is it won't go away in 2008, even though Treasury Secretary Henry Paulson was able to push through a plan (BusinessWeek.com, 12/6/07) to relieve many homeowners facing foreclosure. November hit another record for foreclosures, and for the third quarter of the year delinquencies were at their highest rate since 1986, according to the Mortgage Bankers Assn.
Still, it was a good year for Goldman Sachs (GS). Not only did the investment bank outperform its competition by coming up with third-quarter revenues of $12.3 billion, up 63% from the third quarter of 2006, it also saw its alumni, including Paulson, continue to consolidate their reach into the worlds of politics and finance. Former Chief Operating Officer John Thain took over at Merrill; another former COO and ex-Treasury Secretary Robert Rubin, assumed the chairman's office at Citi; former equities honcho Duncan Niederauer stepped in as CEO of NYSE Euronext (NYX); and former Executive Director for Legal and Government Affairs Joshua Bolten now serves as White House Chief of Staff.
The housing crisis has also forced lenders to tighten up on credit standards in the hopes that loans will stop being made to people who cannot afford them over the long term. It also drove several mortgage companies out of business, even threatening the industry leader (BusinessWeek.com, 11/28/07), Countrywide Financial (CFC), and leading Congress to look into revising lending laws. Sound policy, but a little too late, some would say. The upshot is that not only are homes becoming more expensive to buy, but so are many other big-ticket items, such as automobiles and major appliances.
In the Tank
This is exactly the kind of problem Detroit, already being pummeled by a drop in SUV and pickup sales, doesn't need. General Motors (GM), Ford (F), and Chrysler all negotiated historic deals with the United Auto Workers to reduce their labor costs (BusinessWeek.com, 11/15/07), as well as invested billions into designing new cars. But for many in the auto industry, 2007 deserves to be as forgotten as the Edsel.
One of the leading reasons behind the woes plaguing the auto industry is the steep rise in oil prices. The cost of a barrel of oil has been flirting with $100 for months, and it looks like it'll stay above $80 for the foreseeable future. It remains to be seen how that will translate at the pump, but 2007 was the year Americans got used to paying $3 or more for a gallon of gas.
There is one silver lining to high-priced oil: It is bringing increased pressure on both Detroit and the energy industry to concentrate their resources on developing greener products and technology (BusinessWeek.com, 11/21/07). Not only that, but companies such as Google (GOOG) and venture capitalists such as Vinod Khosla have begun pouring millions into renewable energy and improving energy efficiency.
Speaking of Google, the Mountain View (Calif.)-based search and technology giant had a banner year, with its stock price peaking at $747.24 in October (it ended at close of trading Dec. 7 at $714). In 2007, not only did founders Sergey Brin and Larry Page, and CEO Eric Schmidt, invest in renewable energy, but they also looked to unveil game-changing office software, mobile-phone networks, and more.
The tech sector enjoyed a pretty good year overall, in fact—at least until the third quarter, when even it fell victim to the subprime fallout. But clear winners emerged—none more so than VMware's (VMW) Diane Greene, who took her software company public in August. Nevertheless, the share price is still off more than 27% from its high of $125.25.
Another tech winner was Apple's (AAPL) Steve Jobs. The company's iPhone, which hit stores in June, has been a huge commercial and critical success, but its other products—the iPod, the MacBook Pro, and its new Mac OS X Leopard operating system—underscore why the Mountain View (Calif.) company has had its best year on record and a stock price flirting with $200 a share.
Stock and Dollar Hits
The stock market was another source of concern this year, as ever, even though it also hit a record, cracking the 14,000 mark (BusinessWeek.com, 7/17/07) not once but twice, only to each time be battered down by new waves of subprime fears. In fact, in November the Dow fell below 13,000 for the first time since August, although it has climbed back to 13,625 as of the market close on Dec. 7. Still, investors remain worried the full extent of the credit crisis is not yet known.
Another factor weighing heavily on investors' minds is the sinking dollar. As 2007 draws to a close, the dollar is worth less even than the once-lowly Canadian loonie and is being creamed by the euro. From its high in January to its late November low, the dollar lost about 13% of its value (BusinessWeek.com, 11/8/07) against the currencies of other wealthy nations. It declined only 5% over that period against China's yuan—but that's one reason the U.S. trade gap with China kept growing.
A source of more worry: China and other major buyers of U.S. debt, whose money pays for America to keep its collective lights on, are beginning to consider alternatives to the almighty dollar (BusinessWeek.com, 11/13/07). As other countries and currencies solidify, investors are no longer fearful of putting their money into other denominations, especially the euro. While the greenback still remains the investment vehicle of choice, if it continues to weaken, so will the appeal of U.S. debt.
And it probably will continue to do so as rates remain low and our trade imbalance remains high. It's a trade-off. By making U.S.-made products and services more competitive, the hope is that overseas consumers will find them more attractive, whether that means a new car or a New York City hotel room. More important, low rates will continue to keep the credit markets buoyant and fears of recession at bay. But those same low rates discourage institutional bond buyers looking for higher returns.
Of course, given the wealth that was generated overseas in countries ranging from Russia to Dubai, the U.S. could be on the verge of a seismic shift, where it is possible to envision a time when it will no longer be the dominant economic superpower. True, it still has the world's largest economy, but others are catching up.
China is clocking in its fifth consecutive year of double-digit growth, with gross domestic product expected to grow more than 11.5% in 2007. A swelling trade surplus has contributed to massive foreign exchange reserves of more than $1.4 trillion. India is seeing 9% growth. Russia and the Middle East, even Venezuela, are basking in the reflected glow of vast oil reserves, and they are using that wealth to assert their own economic independence and national direction.
But there are hopeful signs. In addition to the blossoming of green technology, Led Zeppelin, the Police, and Van Halen all got back together to the delight of millions of fans around the world. Too bad about Britney, though.
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