Who’s to blame? The human race, first and foremost. Well-intended public policy, second. And Wall Street, third — if only for taking what generations of policy makers have so unwisely handed it.
This Op-Ed piece in the Sunday New York Times by James Grant makes a good point about the Federal Reserve being too quick to intervene to let irresponsible risk-takers off the hook in the subprime collapse. He applauds, rightly, Fed Chairman Ben Bernanke’s resistance to demands for broadly lower interest rates:
Maybe he is seeing the light that capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich.
But on the way, Grant lets the main actors in the debacle, lenders and regulators, off the hook and perpetuates a bogus business-press truism that unscrupulous conduct is inevitable or somehow even necessary for our economy to work. I also feel that this view from 30,000 feet provides a too-convenient perspective for a business press that is often too busy cranking out flattering profiles to hold bad corporate actors to account.
Every time we have one of these meltdowns, the business press will tell us that they knew those mortgages (real-estate limited partnerships, analyst reports, tech shares, Bernie Ebbers, Adelphia, etc.) were trouble all along, everyone knew it, in fact, and besides, you know, ‘twas ever thus, or something—anything other than introspection.
To blame human nature “first and foremost” is not only not helpful; it is also a way of writing off thousands of subprime borrowers who are about to lose whatever slender equity they had on mortgages that any experienced lender knew they could never afford—mortgages that were then larded with adjustable rates, prepayment penalties and other small-print traps.
It is to say, I think, that people like these—in this case, greedy, subprime, home-buying overreachers—have always been around to get suckered on some financial toxic waste or other (anybody remember the syndicated real-estate partnerships scandal from the ’80s?), and that’s just the way it is. Wall Street and its frontmen, I mean, lenders and financial advisors, will always be there to leave the next generation of Main Street marks (borrowers, investors, insurance policyholders) wearing a barrel and straps.
After each one of these, um, investment opportunities is exposed, someone in the business press will be there to take the long view: Don’t worry, they will say, we’ve seen all this before. And we didn’t do anything about it then, either.
Grant makes an important error, I think, by putting lenders and borrowers on the same level of sophistication and therefore responsibility. That’s here:
Possibly, one lender and one borrower could do business together without harm to themselves or to the economy around them. But masses of lenders and borrowers invariably seem to come to grief, as they have today — not only in mortgages but also in a variety of other debt instruments.
The view that lenders and borrowers are two equal sides to a contract misses the commonsense reality that lenders, mortgage brokers, and other professionals, who might do ten transactions in a morning, have a material advantage over borrowers, that is, the public, who might do one such transaction every ten years, if that. This is why we have truth-in-lending and other consumer protections.
The false equation also ignores a fact made explicit in yet another in a string of fine subprime stories in the Times the same day: that Countrywide Financial Corp. and other lenders violated their obligations to make loans only to qualified borrowers and used irresponsible sales tactics reminscent of “boiler-room” stock brokerages of the late 1990s.
WORKDAYS at Countrywide’s mortgage lending units centered on an intense telemarketing effort, former employees said. It involved chasing down sales leads and hewing to carefully prepared scripts during telephone calls with prospects…
If clients proved to be uninterested, the script provided ways for sales representatives to be more persuasive. Account executives encountering prospective customers who said their mortgage had been paid off, for instance, were advised to ask about a home equity loan. “Don’t you want the equity in your home to work for you?” the script said. “You can use your equity for your advantage and pay bills or get cash out. How does that sound?”
How does that sound? Sounds bad.
And it was systematic:
“The whole commission structure in both prime and subprime was designed to reward salespeople for pushing whatever programs Countrywide made the most money on in the secondary market,” the former sales representative said.
And check this out:
Regulatory filings show that, as of last year, 45 percent of Countrywide’s loans carried adjustable rates — the kind of loans that are set to reprice this fall and later, and which are causing so much anxiety among borrowers and investors alike.