[FoRK] The Bezzle: the underlying fraud in banking / mortgage lending
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.
> "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?
> Here're some more pictures, courtesy Calculated Risks:
More information about the FoRK