Bank Lawyer's Blog

Increase In Foreclosures=Increase In Crime?

Not long ago, Pravda National Public Radio had a story on its "All Things Considered" afternoon show (to listen, follow this link) that discussed some of the aftershocks suffered by residents of California's "Inland Empire" due to the earthquake caused by the collapse of the subprime lending market. In addition to the negative effects on the financial well-being of residents and local governments caused by the "trauma of foreclosure," the reporter alleged that there was concern about the rise of crime due to all the vacant homes, presumably vacant because their owners are subprime borrowers who have either been kicked out of the houses by foreclosing lenders or have walked away from a loan that they no longer can afford to, or wish to, repay. No statistical evidence was cited by NPR to back up the contention that more vacant homes meant more crime, although the lead incident in the report related the story of a female realtor who was brutally attacked in a vacant home by a renter of room in a nearby single-family home. The family that owned the home was in danger of losing it by foreclosure, and had taken in a boarder to meet the mortgage payments. I thought that this incident could be used to argue that socially responsible human beings, who take extra measures to meet their legal obligations (like renting a room in their home to meet the mortgage payment) are to blame for increased crime, but NPR seemed to believe otherwise. Dallas is one of the real estate markets least affected by the national downturn, and, yet, had its own recent incident of a female realtor murdered in a fully-furnished model home by a man who was gainfully employed but was simply a sociopath who engaged in a crime of opportunity. That tragic incident was not cited by NPR, perhaps out of ignorance, or perhaps because it would have conflicted with the pre-conceived conclusion of the reporter and/or producer of the story.

Yesterday's Housing Wire reminds us of another facet of crime related to the foreclosure crisis: mortgage-related fraud.

The Federal Bureau of Investigation said late Tuesday that mortgage fraud looked to be a rampant problem during 2007, with the number of mortgage fraud Suspicious Activity Reports referred to law enforcement increasing 31 percent last year, to 46,717.

The total dollar loss attributed to mortgage fraud is unknown, the FBI said; however, seven percent of reports filed during 2007 indicated a specific dollar loss, which totaled more than $813 million.

"The $813 million loss denoted in this report is just the tip of the iceberg, reflecting only a small percentage of financial damage suffered by victims of mortgage fraud," said Assistant Director Kenneth W. Kaiser, on the FBI’s Criminal Investigative Division.

[...]

Fraud was a problem on the way up in many housing markets, to be sure, but FBI’s report signals an interesting shift towards the effect of the housing downturn on mortgage fraud activity, which is increasingly centered on suspect "foreclosure assistance" programs.

"The downward trend in the housing market provides an ideal climate for mortgage fraud perpetrators to employ a myriad of schemes," FBI analysts said in a mortgage fraud report, released Tuesday. "Emerging and re-emerging schemes in 2007 included builder-bailouts, seller assistance, short sales, foreclosure rescue, and identity theft exploiting home equity lines of credit."

It's true that crime is rampant in this country, and as hard as it is to believe, it's not all of it is connected to the "trauma of foreclosure," or even to residential real estate. Luke Mullins of US News & World Report's blog "The Collar," writes about a 72 year-old criminal who recently managed to get 330 years in prison. He wasn't traumatized by foreclosure and he didn't attack anyone in a vacant house, much less a female realtor. He did, however, bilk hundreds of investors out of tens of millions of dollars. As Luke wryly notes, "[b]arring a scientific breakthrough in cryogenic technology, Schmidt will spend the rest of his days behind bars...Under the terms of the sentence, Schmidt would be released from prison in 2338." Luke then cites fellow blogger and law professor Douglas Berman, who's a glass-half-full kind of guy (as is Bank Lawyer's Blog's author): "'Then again,' Berman says in his blog post, 'with 15 percent good-time credit, Schmidt may be able to get out as early as the year 2289.'"

For those patriotic citizens who feel all this talk about US crime is a tad disloyal, we'll point out that crime has worldwide appeal, even in corners of the earth where one man's subprime is another man's palace, and where the governing class makes the American Mafia look like a cloister of Carmelite nuns. Two men from former Soviet Socialist republics (and one from Miami, which some Americans allege is a foreign capital masquerading as an American metropolis) were charged with hacking into restaurant chain Dave & Buster's computer system and stealing the credit card information of 5,000 customers, causing at least $600,000 in losses. I suppose $600,000 isn't enough to merit anything close to 330 years; however, one defendant was unlucky enough to be arrested and imprisoned in Turkey since July 2007. If he's subject to some of that good old Turkish "Midnight Express" action, he may want to trade 330 years in a US prison.

As we've said many times before, Eastern Europe is a hotbed of cybercrime, a land where amorality and intellectual prowess merge to create a super breed of cybercriminal. There's no need for the "trauma of foreclosure" to spur these crooks onward and downward. 

NAR President-Elect Brays About Banks

The National Association of Realtors has long been a favorite target of this blog, primarily because we love to bag game that's easy to hunt, and NAR is so easy that it really ought to be considered roadkill. Last year, NAR President Pat Vredevoogd Combs boldly predicted that Congress would enact a permanent ban on national banks entering real estate brokerage by the end of 2007.  Didn't happen. Then there was the long -standing battle to prevent Wal-Mart from getting a bank charter, which NAR looped into the national bank/real estate debate. NAR also made a helpful suggestion last year that FHA step into the breach to solve the subprime lending crisis by refinancing subprime loans of delinquent borrowers after the subprime mortgage holder agreed to write-offs of principal balances (which is the same idea Barney Frank has been pushing with his legislation, which was recently passed by the House and which the White House has promised that the President will veto). Again, bankers said "Thanks but no thanks."

Last week, the president-elect of NAR, Charles McMillan, carried on NAR's fine tradition of bank bashing by blaming the entire state of the depressed real market nationally on conservative lenders who impose prudent underwriting guidelines on residential loans.

A rebound in the housing market is being held back by stingy lending standards, the president-elect of the National Association of Realtors said Thursday.

Irving real estate agent Charles McMillan – who takes over as head of the 1.3 million-member Realtors association later this year – faults mortgage companies for keeping some potential homebuyers out of the market.

"All of the relief that's been given to the banks in the marketplace has not trickled down to the consumer," Mr. McMillan said at the annual meeting of the National Association of Real Estate Editors in Dallas.      

"What they have done is raise fees and make qualifications almost impossible for people to get loans," he said.

In particular, Mr. McMillan criticized the high costs of so-called jumbo loans – mortgages of $417,000 and more – that are chilling buyer demand in many markets. Interest rates on such mortgages now are much higher than those on smaller loans.

And Mr. McMillan said that in some depressed housing markets lenders are raising costs even higher to homebuyers and making it tougher for them to qualify for loans. "That stigmatizes properties unfairly," he said.

You knew this was coming, didn't you bankers? Politicians are lambasting you and your regulators for lax lending standards, for making "liar loans," for tricking unsuspecting borrowers into loans that they couldn't afford to repay. The regulators are looking up your nether regions with electron proctoscopes, yammering at you to tighten up lending standards, increase loan loss reserves, and beef up capital. Right on cue, here comes this idiot from Irving (Texas, unfortunately) complaining that not only are you too darn conservative, you're taking "all the relief that's been given to you" and keeping it for yourself. You're not letting it "trickle down" to the little guy: the realtor.

What's "all that relief" you ask? Don't bother confusing Mr. McMillan with his lack of facts, bankers. He's got to blame somebody that the residential real estate market sucks, and he certainly wouldn't want to acknowledge the fact that realtors have been putting people into homes they can't afford for years, finding them mortgage brokers who will make a loan to a corpse as long as there's a yield spread premium and an origination fee in it, and that's fine by them as long as they get their real estate commissions paid.

Put simply, lenders haven't been given relief except with respect to access to liquidity, which they need to survive in the face of sustained losses from operations. Many lenders don't have the capital to fund growth, and if they did, they wouldn't pump it into assets like residential mortgage loans, for which the market's shrunk dramatically. As to underwriting standards being "too tight," tougher underwriting standards are long overdue, are required by all mortgage market participants and their regulators, and for the foreseeable future will be a fact of life. Get used to it, Chuck. Whining makes it appear, perhaps accurately, that you don't understand the new paradigm.

NAR also is concerned about homeowner anger management.

"We have consumers angry that they can't sell their homes," Mr. McMillan said. "America is hurting now."

Here's a helpful suggestion for alleviating the anger and the pain. NAR should fund a financing vehicle to buy all these great loans they want banks to originate with looser underwriting standards. In fact, NAR ought to set up a program in which realtors invest half of their commission in such loans, since they're obviously a great investment and, in doing so, they would help everyone concerned, including, especially, those hurt and angry home sellers. In addition, realtors should personally guarantee these loans, which (assuming the realtors have sufficient net worth and/or income streams) would make these loans a lot more attractive to lenders who might be a bit gun shy. Or, perhaps, NAR and/or its members could fund private mortgage insurance for such loans. That way, realtors will be performing a public service and simultaneously making themselves rich by taking advantage of the fact that banks and other mortgage lenders have overestimated the risk inherent in residential mortgage loans. They'll also provide the grease that will get this residential real estate wheel rolling again, just like in the good old days before the crash.

On the other hand, NAR might start treating its members like the adults they are, realize that real estate's a cyclical business, and that we're going through a down cycle, which will take time to work itself out, and stop making such a public ass out of itself.

I have a feeling that NAR represents the views of its rank and file members as well as the American Bar Association represents its members. In other words, not well. I know too many savvy realtors who understand reality as well as realty to believe that hysterics like those put out by Mr. MacMillan represent their considered views.

How About A Moratorium On Moratoriums?

Word came today from Teresa Rice, General Counsel of the Minnesota Bankers Association, that a major amendment was made on the Minnesota Senate floor on Monday of this week that exempts loans originated by state or federal banks, savings banks, or credit unions from the one-year foreclosure "deferment" provided by the Minnesota "Subprime Borrower Relief Act of 2008." The law has been making banks in the land of a thousand lakes sweat a bit (a lot, actually). In an e-mail to me today, Tess stated that the proposed legislation "is the first major bill in a long time that the Minnesota Bankers Association has had to completely oppose." At the rate the cynics in state legislatures across the country are churning out this chum, it may not be the last.

At least we didn't have to face the astonishing prospect of federally-chartered banks and thrifts pulling out the big stick of federal preemption and then having state banks, thrifts and credit unions cry about a competitive disadvantage (or simply switch charters). Then again, "eligible foreclosed loans" that were originated by non-financial institution lenders and purchased by banks and thrifts (and securities that are backed by such loans) are still in for impairment.

Housing Wire's Paul Jackson reported yesterday on a similar one-year moratorium bill passed by the New York Assembly (along with three other consumer protection measures). It does not appear to contain an exemption for banks, thrifts and credit unions. If it makes it through the Senate and is signed by the governor, perhaps we'll get to see how "astonishing" are the actions of federally-chartered banks and thrifts in pushing preemption. The legislation would give the trial court the right and obligation to determine a new mortgage payment for the duration of the moratorium in an amount "which will preserve the relative financial interests of both parties under terms which are equitable and just." Cool. No rewrite of the mortgagee's contract there, is there? No, there isn't, according to one of the bill's sponsors.

Under the terms of the bill, lenders would need to certify their complete cost of carry — traditionally, around 1.5 percent of unpaid principal balance per month — which would be paid by the borrowers in lieu of their full mortgage payment during the stay period.

Specifically, the bill says that the “lender must establish to the satisfaction of the court the minimum monthly amount necessary to preserve their relevant financial position so as to prevent an erosion of the mortgagee`s financial position.”

Amusingly, the bill also says that “the purpose is to postpone the mortgagee’s profit and not to cancel or alter the terms of the mortgage agreement.” For one thing, lenders don’t profit from a foreclosure, so the bill is essentially winding up losses for all parties, not postponing some sort of phantom profit; for another, the bill most certainly alters the terms of the borrower’s mortgage agreement — that’s the very textbook definition of a one-year moratorium on payments.

Don't throw ugly facts into a perfectly positioned political spiel, Paul. The force of logic's irrelevant to a cynic. Speaking of which, Sheila Bair ought to be on board with this bill, regardless of its financial impact on any FDIC-insured institutions. It appears to be pro-consumer, and underlying financial reality is not a consideration.

The long-term foreclosure moratorium appears to be the flavor of the day for pols eager to show the voters that they'll stand up for the little guy and face down evil  mortgage lenders. New York State Assembly Speaker Sheldon Silver spun it so well.

"The federal government was quick to bail out big businesses like Bear Stearns from near-collapse, but seems to have all but forgotten the everyday common household victims of this national crisis," said Silver. "We in the Assembly Majority want to see New York's families stay in their homes and our communities to remain intact. Our package is not a bail out. It's an assistance program to help homeowners in our state keep the American dream from turning into a nightmare."

That's right, the unique "bailout" of Bear Stearns to prevent a general collapse of the financial system (which even economic moralists like Warren Buffet and Charlie Munger thought was a justified exception to the "moral hazard" rule) is the same as artificially delaying the foreclosure of thousands of subprime loans to borrowers who can't pay them now and won't be able to pay them in a year. And the fact that it's an election year means that "the Assembly Majority" doesn't give a rat's tukus that the effect of such legislation won't make a silk purse out of a sow's ear, which will still be attached to the same lipstick-wearing pig when the moratorium expires. Of course, that will be after November 2008, won't it? At that point, while the voter/borrower pigs are butchered, the legislator pigs will be back grunting at the public trough.

Cynicism or Stupidity? You Be The Judge

At the end of a long day, I tried to catch up with my "professional reading" (The Economist, The Wall Street Journal, a trade paper that doesn't list this blog in its roundup and, therefore, is dead to me, Sports Illustrated's Swimsuit Issue, etc.), and what did I read right out of the gate but this cynical nonsense.  I was about ready to start fisking the report when I decided to check with a few of my favorite bloggers first and, sure enough, Tanta and PJ had already taken care of business.

Paul Jackson at Housing Wire pummeled this sorry report today like Jake LaMotta pounded Sugar Ray when he was really, really cranky. As I read his piece, I couldn't get Robert De Niro in "Raging Bull" out of my mind ("I'm the boss-boss-boss-boss-boss-boss-boss-boss-boss!"). Just a sampling, then read the rest.

There isn’t an effective loss mitigation strategy I know of that can solve for fraud. Extending foreclosure timelines, or introducing more uniform standards for loss mitigation — both “solutions” proferred by the state AGs in their report — will actually serve to make fraud even more costly for everyone involved. And that’s the last thing anyone who wants to see housing recover should be rooting for.

[...]

In no small part, fixing the current mess is tied to fixing fraud; and that means fraud at all levels, from borrower to broker to lender. It’s both as simple and as complex as that.

Which means that it’s time borrowers, consumer groups and erstwhile working groups stop floating a revisionist history of the “hapless borrower” — you know, the one where greedy, mean lenders duped those innocent and pure borrowers? — as a substitute for what’s really going on in the real world.

Yeah, it's time, Paul, but what are the odds?

Although Tanta claims that she's merely "piling on," she actually dissects the report like a scalpel-wielding Hannibal Lechter looking for a liver to go with her fava beans ("When I opened the cranium, I found little grey matter but much fecal matter."). Her always spot-on dissection is, of course, greatly aided by the fact that she (as does Paul) has an unfair advantage over the report's authors: she actually understands the mortgage business. Her carefully considered conclusion coincides with my initial gut reaction.

The lesson of the "stated" disaster--stated income, stated assets, stated appraised values, oral "promises" of loan originators rather than clear written disclosures, the whole cluster of practices that removed the "barrier" of "paperwork"--is apparently still lost on the Working Group. We started this by being "efficient" about the documentation and casual about the borrower's own statements; we aren't going to get out of it that way. This report just reeks of political grandstanding. I'm sure I know at least one journalist who will love it.

"Political grandstanding"? You betcha.

I was talking today with an attorney who represents a financial institutions trade association, and is intimately involved in legislative efforts at the state level to "solve the subrime mortgage mess." I was commiserating with him over the apparently limitless supply of clueless legislators (my phrase, not his) who insist on doing precisely the wrong thing at exactly the wrong time. I know it's an election year, which means political cynicism is elevated above its normally high levels, but I told him that it's got to be especially tiring this legislative session trying to beat back wave after wave of ill-advised legislative interventions in the mortgage markets that even quarter-wits like yours truly can see will not only not address the intended problems, but will likely make the problems worse and, simultaneously, create a whole batch of new ones. He agreed wholeheartedly, and ruefully observed that we've still got a long way to go until November.

I asked him whether the legislators who were so eager to "do something" were amenable to listening to reasoned explanations as to how their legislation might be useless or much, much worse. His reply is that they don't want to listen because they simply don't care. They don't care about the facts and they don't care about the actual effect of the legislation. All they care about is being able to go back to their constituents, who understand  the mortgage market even less than they do, and tell them that they "did something." Adverse results likely will surface down the line, and a reasonably competent politician can always spin the story so that someone else is to blame.

This may be a long, hot, tiresome summer.

 

Big Law Feasts On Subprime

I don't know about my readers, but when I see a headline like this one from a recent issue of the Houston Business Journal ("Law Firms Brace For Subprime Fallout"), I envision  a gaggle of shysters locked in an office, hard hats perched on heads to shield their big brain pans, grasping two-by-fours that brace the ceiling against an onslaught of subprime turkeys plummeting to their doom from a helicopter hovering above, like in that old episode of WKRP in Cincinnati ("Oh, the humanity!" "As God is my witness, I thought turkeys could fly."). But, no, that would be inaccurate. Instead, large law firms, in Houston at least, are merely licking their chops over what's for dinner: litigation, bankruptcy, and various other forms of plague and pestilence.

Fulbright & Jaworski LLP's six-month-old global subprime practice numbers 100 attorneys. Most firms are starting small with units of 10 to 20 litigators, corporate bankruptcy specialists and white-collar crime lawyers.

Andrews Kurth LLP has assigned 13 lawyers on an ad hoc basis to the firm's newly formed subprime and distressed assets group.

"It's something we've been talking about a while," says Tom Perich, Houston managing partner for Andrews Kurth. "Our thought was that we're big in all these areas that were impacted, it seems like we know all aspects of this thing, and we've got the lawyers and finance experts."

[...]

Perich says the group likely could grow to dozens considering all signs indicate there will be plenty of work to go around.

"The front-line action is going to be lawsuits," he says. "People are going to be suing each other, so you've got to have front-line litigators. They need the subject expertise behind them."

The article doesn't note it, but I'm convinced that he punctuated his remarks about these joyful prospects with just the littlest line of drool running down his chin. When so many carcasses are being broiled over an open flame, the smell can drive you wild. You know you're in nirvana when it smells like subprime spirit.

And when it comes to economic disasters involving banks and real estate loans, where better to find your hired guns than The Great Republic?

The transition into subprime practice was not difficult. Many Texas law firms saw significant work in similar areas during the bust years of the 1980s and savings and loan scandals of the 1990s.

"We had probably our greatest growth spurt in the '80s," Perich says, noting the firm grew by 50 percent.

"A lot of those guys are still here," he says.

Ah, the good old days! As for "a lot of those guys" still being here, what he didn't add was the sentiment "and maybe we can squeeze another 3000 billable hours out of them before they flame out."

The article lists the plethora of potential defendants, which offers ample opportunity for "bet-the-firm" litigation, the kind that can suck the life out of paralegals, associates and contract attorneys, leaving them dried husks to be tossed on the fire of the equity partner pyramid, to be replaced by a never-ending supply of young suckers up-and-comers. Investment banks, mortgage companies, title companies, home builders, and investors are all candidates who can look forward to spending quality time with litigation and bankruptcy counsel, after which they can end their existence as biodegradable suicide bombers in a theater of action of their choice, because that's all they'll be fit for.

One of my pet peeves about the entire sales pitch of a "subprime practice group" has been that this isn't anything special. It's the same old skill sets applied to the latest segment of our economy to falter. Craig Weinstock of Locke Lord Bissell & Liddell LLP gets it.

"Nobody was born a subprime lawyer," Weinstock says. "These are folks who have depth of experience representing in the securities fraud area, financial institutions, white-collar crime -- expertise that is now being turned to these current problems."

My favorite line is from Wayne Kitchens of Hughes Watters Askanase LLP.

"Our entire default servicing group and a large part of the litigation group deal with subprime issues, lenders and borrowers on a day-to-day basis and has for years," says Partner Wayne Kitchens.

Hughes Watters is continuously in a subprime mode.

Says Kitchens: "Subprime is already such an intrinsic part of our practice that we felt no need to start any new group or section."

How strange are these times when a firm is described a being "continuously in a subprime mode" and that's a compliment.

Welcome to the Roadkill Cafe, boys and girls. Our steaks are Grade A (sub)Prime. And there's plenty for everyone.

The More Things Change, The More They Really Change

What difference a decade (or two) makes. This time around, while other parts of the country are being hit by declining prices and increasing foreclosures, Texas looks comparatively peachy.

Texas is bucking the national trend of rising property foreclosure rates, according to a California-based research company.

A total of 10,700 Texas properties entered the foreclosure process during March, down more than 16 percent from the volume of filings recorded in March 2007, a recent report by Calif.-based RealtyTrac shows. The March foreclosure figure also represents a decrease of almost 13 percent from filings reported this past February.

Nationally, foreclosures are up 57% annually and 5% from the previous month. Texans ought to be absolutely giddy. Well, somewhat relieved, anyway. It could be worse. We could live in California, Florida or Ohio. Then again, a friend of mine in Colorado (fifth in foreclosures, by the way) observes that "you still have to live in Texas." He thinks that is the ultimate downside, while "we'all" think it's the cherry on top of the sundae.

The recently released national figures also show an increasing trend of deeds-in-lieu-of-foreclosure being used by borrowers who default on their loans.

James J. Saccacio, CEO of RealtyTRAC, points out that on a year-over-year basis as of the end of March, default notices and bank repossessions nationwide were up nearly 57 percent and 129 percent, respectively -- an indication "that more defaulting homeowners are simply walking away and deeding their properties back to the foreclosing lender," Saccacio says.

Auction notices, by comparison, jumped by 32 percent during the period.

"This deed-in-lieu-of-foreclosure process allows the lender to take possession of a property without putting it up for public foreclosure auction," Saccacio adds.

At first blush, the number of borrowers who are willing to "walk away" (a highly charged term to use, by the way) from their home-sweet-home seems to call into question all the previous hand-wringing about the need for foreclosure moratoriums and similar measures designed to force lenders to change their evil ways and to prevent them from seizing borrowers' homes through the foreclosure process and then kicking the borrowers, bawling their eyes out, into the streets. Increasingly, it appears, more and more borrowers are willing to cough up the keys without going through the foreclosure process.

In a customary deed-in-lieu situation, the consideration for the deed is the release of the borrower from liability for any deficiency (with some protections to the lender for such things as fraud, waste and bankruptcy within a certain period). Apparently, a rapidly increasing proportion of borrowers who can't afford the loans believe that's a fair trade, and it's hard to argue with them if the lender's willing to forgive the loan balance and either (a) the borrowers can't afford the loan or (b) the collateral is underwater and they simply don't want to pay the loan back even if they could do so. Emotionally, these may not be homes to some of them, but rather merely an investment in real estate that simply didn't work out. It's impossible to generalize, and RealtyTrack doesn't give us much insight into why borrowers are increasingly willing to give lenders a deed-in-lieu.

Lenders apparently have decided that in many cases they'll take the entire risk of a declining home price if it saves them the cost and time of foreclosure. They must also be deciding either that the borrowers don't have the financial resources to satisfy a deficiency (in those states where a deficiency is permitted) or that the cost of the struggle to collect it outweighs the benefit. Perhaps the moratorium bills and other strong-arm tactics are achieving a purpose, after all, albeit not the announced purpose of keeping delinquent homeowners in their homes.

Interesting. I wish we had more data about this phenomenon that gave us the percentage of defaulting borrowers who have given a deed-in-lieu-of foreclosure and that broke that group down further according to the different reasons for that decision. Without that information, we're guessing, and, in some cases, letting our personal prejudices factor into our use of the limited information we do have available.

Culture Wars

Ethan Penner, the former CEO of Nomura Capital, wrote an Op-Ed piece in last Friday's The Wall Street Journal entitled "Our Financial Bailout Culture," that led me to believe momentarily that he and I are twins separated at birth, until I realized that he's richer and smarter and writes much better than I.

In a bear market – with losses looming for investors, homeowners, financial services executives, homebuilders and the average stretched consumer – the hue and cry for the government to save everyone is reaching a fevered pitch. Even avowed capitalists who enjoyed the benefits of bull markets are now advocating government intervention. Government officials need little prodding to respond, and so the process of increased regulation has clearly begun.

Every day comes news of the increasing creep of the public sector. State governments, frustrated by the impact of the housing crisis on tax rolls, are implementing laws to stall or impede foreclosures. The Federal Housing Administration, granted (along with Fannie Mae and Freddie Mac) a huge increase in its loan limit, is now close to making the increase permanent.

The unstated premise is that, with better government oversight, we would not be suffering today's bear market and financial chaos. Of course, during the previous outsized boom, no one was calling up his congressman to complain that home values were appreciating too quickly. Meanwhile, they drained that appreciation regularly through refinancings to pay for vacations, new cars and other pleasantries, all of which created the prosperity for which politicians were pleased to take credit.

He hammers home a point I, and other bloviating free marketers, have been yammering about for some time now: "moral hazard." As Mr. Penner puts it so well, "[c]onsequences not suffered from bad decisions lead to lessons not learned, which leads to bigger failings down the road."

And so we have the insidious modern trend to shirk responsibility and blame others for our missteps. This trend, this "victim mentality," is a path toward personal disaster.

Perhaps if the Fed had raised short-term rates more aggressively, the excesses of the bubble could have been avoided. Maybe regulators could have noticed that the criteria for achieving an AAA rating had weakened markedly and inserted themselves early on. Yes, we can hope that the government takes the appropriate steps to ensure that the regulatory system improves as a result of this crisis. However, we citizens also need to accept our share of the responsibility.

Homeowners must learn that there are risks to using a home as an ATM. Investors who borrowed to flip condos must learn the downside of such risk. Individuals who steered money from insured bank deposits into uninsured money market accounts to pick up 1% more yield – like the institutional investors who purchased complex securities with little due diligence – need to know that in an efficient market, extra yield means extra risk. Those who played the derivatives market, focusing more on computer-driven pricing models and less on managing counterparty risk, must pay for that oversight. And, much as it is impolitic to say, people who took money from lenders and signed without considering how they'd repay those loans must also be held accountable.

In one of this year's primary debates, Ron Paul said it is not the president's job to run the economy. I'd add that it is not the government's job either. It is each and every citizen's job to manage our own affairs, make our own decisions, bear the fruits or painful consequences and learn our lessons.

The free market is the essence of our society's strength and is rooted in the Lincolnian precepts of accountability and responsibility. When decisions are made and actions taken (or not taken), there are consequences. These consequences are models for us to learn from and serve to stimulate social growth and advancement.

As my high school wrestling coach to say, a sadistic grin on his face as he watched one of his charges bend another into the shape of a pretzel, "No pain, no gain." Having been, occasionally, a bent pretzel, I realize that's easy to say and much less easy to endure. That realization doesn't make it any less true.

Unfortunately, I think that as far as the free market is concerned, Elvis has left the building. There's absolutely no way, in an election year, that pain will be allowed to teach anyone anything. No political party in recent memory has obtained or retained office by telling the voters to "suck it up" and suffer the consequences for their bad decisions, or, even, for the fact that life is sometimes cruel without a discernible cause. There was that third party guy back in 1992, with the bullet haircut and the funny accent, but all his straight talk gave the country was eight years of a White House resident who found an unusual use for fine cigars.

Whether or not government intervention makes hard lessons impossible to learn, or, in fact, teaches the lesson that Uncle will always be there to bail you out from your bad decisions, and even from the application of the equally painful lesson that, sometimes, "stuff happens," the government will continue to intervene to attempt to ease the pain. The only question is how much will it intervene and, when the dust settles, how will the law of unintended consequences play itself out.

Because you know it will play itself out.

Six Simple Rules

Banking Law Prof gives everyone a hit list of "takeaways" from the subprime mortgage mess:

    1. There’s blame enough to go around.
    2. Those who do not remember the past are condemned to repeat it.
    3. If it sounds too good to be true, it probably is.
    4. If you don’t understand it, don’t invest in it.
    5. What goes around comes around.
    6. It’s still good to be the little pig who built his house of brick.

I especially like the last one, and appreciate the irony of the fact that in this the Lone Star State, the brick houses have been built by folks who a sizable portion of the American public apparently desires to ship "back home" pronto, no matter what the effect of that forced exodus might be on an economy currently teetering on the brink. The ripple effects of the housing debacle continue to roll out, and as today's The Wall Street Journal noted, homebuilders are under the gun. Which, of course, means that their "anxious lenders" (as the Journal describes them) are also under the gun, as we observed a few moons ago. With all due respect to the Tom Tancredos and Lou Dobbs of American politics and media, what we don't need to do at the moment is to ship the homebuilders' labor force "off-site" for an extended  siesta in their "home country." Homebuilders may not be throwing houses up like bluebonnets anymore, but at least in this part of the world, they're still building and selling them. Let's remember lesson number 2 above and exercise not only a little compassion, but a little common sense. Before we learn lesson number 5 the hard way.

This message was NOT approved by John McCain, Barack Obama or Hillary Clinton.

Moral Hazards

A colleague and friend wrote to me recently about what I thought of this article in last Sunday's The New York Times by Gretchen Morgenson, that starts off with a typical focus for The Grey Lady: the venality of big banks.

What are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms for the past year?

Or all of the above?

Stick around, because we’ll soon find out. And it’s not going to be pretty.

Morgenson's ire is focused mainly on the Fed-engineered "rescue" of Bear Stearns by JPMorgan Chase. She points to all the greed and grime that Bear Stearns has left in its rough-and-tumble wake as it gorged itself on the subprime feast. She labels it "this decade's version of Drexel Burnham" and advocates forcefully that, like Drexel, it should be "left to die."

She makes a telling point when she quotes William A. Fleckenstein, president of Fleckenstein Capital in Issaquah, Wash., and co-author with Fred Sheehan of “Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.”

"Why not set an example of Bear Stearns, the guys who have this record of dog-eat-dog, we’re brass knuckles, we’re tough?" asked [Mr. Fleckenstein]. "This is the perfect time to set an example, but they are not interested in setting an example. We are Bailout Nation."

Morgenson agrees with Fleckenstein.

And so we are. After years of never allowing any of our financial institutions to fail, they have become so enormous that nobody will be allowed to sink beneath the waves. Otherwise, a tsunami would swamp the hedge funds, banks and other brokerage firms that remain afloat.

If Bear Stearns failed, for example, it would result in a wholesale dumping of mortgage securities and other assets onto a market that is frozen and where buyers are in hiding. This fire sale would force surviving institutions carrying the same types of securities on their books to mark down their positions, generating more margin calls and creating more failures.

Inevitably, she brings the "moral hazard" argument into the mix, through another quote, this one from Graham Fisher & Company analyst Joe Rosser.

"The Fed has now crossed the line in a very clear way on ‘moral hazard,’ because they have opened the door to the view that they are required to save almost any institution through non-recourse loans — except the government doesn’t have the money and it destroys the U.S.’s reputation as the broadest, deepest, most transparent and properly regulated capital market in the world."

Morgenson ruefully expects "the taxpayer," the poor, old, beaten-down taxpayer, to ultimately pick up the tab if the failures continue. Being one of those taxpayers, I suppose I, too, ought to share her sense of outrage at the "bailout" of Bear Stearns. However, I think the taxpayer shouldn't be looked upon as a blameless "victim" of rampant Wall Street greed.

Many of us (including yours falsely) in the fat and happy land of milk and honey, have been busily filling our pie holes and demanding a larger share of an economic pie that we expect will grow larger and larger until the sun burns out (or we croak, whichever comes first), and are complicit in fostering attitudes that institutions like Bear Stearns merely reflect. After all, Bear Stearns is nothing more or less than the collection of human beings who own and run it. It's not as if the legal fiction that is "Bear Stearns" could "strike a pose" or "have an attitude."

I think the crux of the problem with many aspects of American life is that many of us want, with a libertarian ferocity, absolute freedom of economic action and, simultaneously, an absolute freedom from suffering any adverse economic consequences as the result of those actions. Would Wall Street have idly stood by if Congress, state legislators, and/or federal or state regulators "stifled" their ability to create the subprime mess ("You're thwarting innovation and depriving the poor of access to credit and the American dream of home ownership.")? No, they would not, and they would have been supported by consumer advocates and many of the political and regulatory hacks who now are all over the "innovators" like Lindsay Lohan on a line of coke. As long as everybody was making money, home values were rising, and Americans were using their homes as self-replenishing piggy banks that would always be full, so that they could live the good life, here and now, there were "no worries, mate." If anyone in the government had moved to turn off that gushing spigot prematurely, they would have been crucified.

As the inevitable excesses unwind, does anyone really expect that the majority of the American public, even those who most heartily wring their hands about "moral hazards," would be willing to suffer the economic dislocation that would likely occur if the federal government didn't intervene (especially in a presidential election year) to cushion the blows so that the hot-house flowers that so many of us have become won't wilt under the severe recession that might very well ensue? It's great to teach the "big boys" lessons about "moral hazards" as long as I can still afford my Venti Caramel Macchiato and raspberry scone. The federal government is doing precisely what the average Jack and Jill wants them to do: "Make my life painless."

If the Bear Stearns "bailout" (and ask the employee-shareholders how $2.00-a-share sounds as a retirement plan) is symptomatic of a "moral hazard," it's a hazard that menaces more streets than "Wall." Try "Main."

The Coach Is Busy, So He's Showing A Film

While unsuspecting subprime borrowers are being swept away by a tsunami of foreclosures, yours falsely is about to be swept away by a tsunami of contracts. Therefore, in lieu of actual blogging, I'll merely post a couple of videos worth watching for no other reason than when I see something that irritates me, I must share the pain. I may or may not be back this week.

First up, gasbag Chris Mathews of MSNBC's "Hardball" goads perennial screamer Jim Cramer of "Mad Money" into making a prediction on a January 18, 2008 show that within two or three weeks, a number of large private mortgage and CDO insurers will fail and, when they do, the Dow Jones will lose at least 2,000 points.  Chaos and collapse will follow. No one ever has any of these blowhards back on their show to call "dumbass" on them. That task falls to the lonely blogger.

The second little slice of heaven is a CNN "Your Money" clip from last week in which the gentlemen bloviator almost comes unglued near the end of the segment at the prospect of bank failures. Apparently, it's a theme that's haunted him for some time. Well, start stocking up on Qualudes, pal, because a change is gonna come and banks gonna be failing.

It's not pretty seeing a grown man panic, is it?