jgpietsch

Why 'We've Got To Stick Together'

Thanks JCC, a little rough around the edges, but I wanted to get it out in a timely fashion. I share your concern in general vis-a-vis irresponsible parties... but let's take a look at those actors:

o Homeowners - I tend to think the man on the street relies to some degree on the banker to tell him what he can afford. He may think it is a stretch going in, but when a vaunted "banker" says he's good for it, it confirms his optimistic (if unrealistic) outlook. If he or she mistated assets and earnings, of course that's a different story; it's called fraud. In any event, that home owner has now walked away from 5% to 20% equity. Let's call that $10,ooo to $40,ooo based on typical median US home prices. Not small sums, not to mention the big dings on their credit records and possible bankruptcy status... enough punishment? If anything, the 5% downpayment level (on second homes anyhow), certainly made it too easy for them to walk away, leaving banks with the problem.

o Mortgage Loan Employees - Well, these guys were on commission and undoubtedly pushed more loans through than were deserved. Of course they were incentivezed to do this by their companies that paid on commission. They certainly had a flush run, but are now universally out of the job... enough punishment? To the extent we are talking about the mortgage bankers and such, look at those Lehman employees paid in stock options... now worthless, enough punishment?

o Mortage Loan Companies - On the margin, their management was incentivized to keep up with their competitors in terms of market size and share or be punished by the market. And where were the regulators? It wasn't one or two or three banks doing this alone, or even in collusion, to cover that angle, they were all making the best individual decisions to survive within the herd. Plus, it was easy to drink the coolaid that risk was being spread out appropriately anyhow through reinsurance and CDOs. Plus, like the homeowner, their ratings held up, so it "must be OK, right?" Now they are out of business, out of the job, or holding worthless stock, sufficient punishment?

o Ratings Agencies - Should have been on top of this at least two years ago. Unfortunately, look who pays them! Plus, they also no doubt bought into the notion that risk was spread out and that "real estate has never gone down before." It think this group should be held to a higher standard and realign its incentive structure for their own good reputation, if nothing else. Probably getting the least slack so far, and they deserve more, but will probably get away more or less clean.

o Regulators/Gov - Should have been on this years ago. Some voices (Greenspan) in the woods, but they were not heeded, and it's politically difficult to step in the way of the "American Dream." Which party to blame - both - even though administrative agencies fall under the Pres., Congress has oversight and failed to either understand or act. Vote them out if you can find better replacements.

o Reinsurers - These guys should have known they were headed for a train wreck. Again, look at their stock values now.

Underlying themes are misalignment of incentives, lack of regulatory oversight and/or action, a herd mentality and diffusion of responsibility. It's lame to say no one understood "the complex models," I'm sure they did. The individual models simply didn't consider the possibility of bubble creation through aggregate macro economic effects -- garbage in garbage out. Anyone that stood back and looked at the big picture was likely drowned out by idiots saying, "hey home values have never gone down before."

This is pretty rough, but you get the idea. I'm sure some individuals will get pilloried, that always seems to happen. But really the blame is diffused among so many actors, alot of pain has already been doled out, and now we all need to share in the pain to keep the system functioning.

I don't see how any one of the above parties is necessarily being rewarded here. No one that lost a home is going to get it back (unless they repurchase it for pennies on the dollar from the TARP! Maybe they should be disqualified to bid!) Equity values have plummeted and jobs have been lost, and none of those are coming back overnight. One could even argue that those who didn't sell out months ago or go short the financials should be rewarded with a small bounce. Again, if there was outright fraud or collusion proven, that's a different story.

What do you think?