[FoRK] The Bezzle: the underlying fraud in banking / mortgage lending

Stephen Williams sdw at lig.net
Sun Mar 1 11:37:29 PST 2009


Jeff Bone wrote:
>
> So, you don't buy into the "moral hazard" assertion and the contention 
> that the Dems bear an asymmetrically large portion of the blame?
A) I already said that _I_ buy it.  However,
B) When the lenders and others involved were beyond complicit in setting 
it up and selling these to mortgagees, they are significantly and 
perhaps beyond majority responsible.  Reverse moral hazard perhaps.  Or 
perhaps more correctly: the moral hazard was by those that benefited 
from the setup and sale of the mortgage to the shareholders.  And by 
regulators who didn't have the guts to overcome the Regulator's Dilemma.

This is how it seems to me so far:
In any credit contract, the borrower is making a promise to repay with 
some personally expected probability and certain consequences if they 
don't.  By definition, they are not experts in actuarials or trends.
The lender is making an investment with the probability of success 
guided by actuarials, evaluation of the borrower against those, and 
measure of the current and future market trends.

It is assumed by both parties that both will benefit from the 
transaction, otherwise they wouldn't agree to it.  It is not the 
responsibility of the borrower to keep the lender profitable: the 
pressure of negative consequences along with volume is supposed to do that.

In the recent market, lenders were, in effect, making a bet that the 
housing market would continue to go up, that few people would lose their 
jobs, and that the total impact of negative consequences (bankruptcy 
and/or default) were greater than the cost to repay.  Because the 
willingness to make that bet so deeply caused housing prices to 
skyrocket, borrowers frequently had no choice but to go along to get 
into a house.  Because this was the socially accepted thing to do, and 
perhaps required in many markets, and because the lenders were willing 
to take the risk, it made sense for the borrowers.

Clearly, it didn't actually make sense for the lenders (and especially 
their shareholders or meta-shareholders (taxed citizens), however that 
is not the fault of the borrowers.  It is a fault of the borrowers that 
they went along with this, especially when it was clear that the chance 
of "success" was so narrowly prescribed, however it is not completely 
their fault by any stretch.  The lenders influenced the borrowers, 
cheating the shareholders, and indirectly cheating the borrowers due to 
higher home prices, etc.  Some borrowers are over some kind of 
impossible expectations line that might be called cheating the system.  
Many more are in more of a gray area I think.

>
> From 
> http://market-ticker.denninger.net/archives/837-The-Underlying-Fraud-In-Banking.html 
>
>
> "Note that Geithner and President Obama have continued this nonsense, 
> and Geithner is one of the people personally culpable for ignoring the 
> law in the first place."

Blaming the Obama administration is just nonsense, at least this point.  
There is no guaranteed path out of this mess.  Every action has 
unintended consequences.  This is totally a Regulator's Dilemma 
gridlock, except that the failure has already happened, so it is not 
fair to blame actions now for the mess that has been building for the 
last couple, or several, terms.

If you want to complain that certain people, who may or may not be 
employed prominently now, were culpable, that's fine.  Pretty much 
everyone in the mortgage selling chain was culpable in some way.  That 
doesn't mean that those people are necessarily the wrong people to find 
the path out now.  I would need more evidence to believe that.
>
> (NOTE THE LATTER HALF OF THAT.)
>
> Also:  "As things stand today I have no confidence whatsoever that The 
> Obama Administration has any intention to act according to law any 
> more than George Bush's Administration did."

I think that the clear consensus is that if we went strictly by law, 
practically every bank and brokerage house would be in a seriously deep 
legal / liability hole.  This is clearly a "it's not illegal if everyone 
does it" situation, reinforced by the fact that the regulators allowed 
it to go on for so long.  That actually can make a law null and void 
with no other action.  What is the right way out of that situation?  Let 
a few fail, make some corporate and individual examples, then get 
everything healthy, taking some skin from everyone in the process.  And 
then beefing up regulation / oversight in a situation where everyone 
finally sees the wisdom of it without fighting to the death.  Doesn't 
that describe current events so far?
>
> Read the article.
Being outraged that laws were ignored to the extreme profit of some and 
the pain of us all is all well and good.  I'm outraged too.  How does 
that change a successful course of action?

sdw
>
> Here're some more pictures, courtesy Calculated Risks:
>
>   
> http://www.calculatedriskblog.com/2009/02/february-economic-summary-in-graphs.html 
>
>
>
>
>
> jb
>



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