“The market made me do it.” That’s what some lenders are telling us about the crisis they’ve created that’s reverberating now from Asia to Europe. Hysteria even hit the Federal Reserve, which dropped its measured demeanor and slashed interest rates by 125 basis points in the space of eight days, with the first cut of three-quarters of a percent announced at 8:30 on the morning of January 22, with the hope of beating back the frenzy that surely awaited the New York Stock Exchange in the wake of a rout in other parts of the world.
Did this have to happen? Was there a natural disaster, like Hurricane Katrina? Or an unnatural disaster, such as September 11th? No. Investors, homeowners, business people and consumers all over the world are paying a pretty steep price for the vast carelessness of some bankers and their compatriots. And it’s not over yet. Indeed, there are banks that still hold billions in CDO’s, not to be confused with COD’s, which is cash on delivery. There’ll be no cash here. These are the Collateralized Debt Obligations made up partially, and sometimes fatally, of sub-prime home loans.
The worst part is this: according to Michael Calhoun, head of the Center for Responsible Lending in Washington, some of those sub-prime loans were made to people who qualified for a regular 30-year, fixed-rate mortgage, but instead lenders took them in the other direction, and took them in. Why? Because there was more profit to be made in sub-prime paper. Also, according to Kathleen Day, with the same center in Washington, some lenders paid kickbacks to mortgage brokers to steer their customers away from conventional loans and toward the sub-prime tar pit.
Now come the bond insurers, who also bit from the poisoned apple of the sub-prime program, guaranteeing some of the funny paper sold over the past few years. Ambac, the second-largest bond insurer, has lost its triple A credit rating from Fitch. So has another insurer called FIGIC. MBIA, the largest bond insurer, is under review, along with Ambac, at Moody’s Investors Service as well as Standard and Poor’s. The trouble here lies, especially, in the municipal bonds they insure, sold by cities and thought to be ultra safe.
Probably they are, but if their insurance is undermined, then their rating will fall back to its basic, uninsured, level and their value could fall as well. This need not be a problem if you hold them to term. Defaults are rare in the world of municipal bonds, but it might be a good idea, I’m told, to be careful of coastal cities which could blow away; hospitals, some of which are under siege from rising costs; utility districts in undeveloped areas; plus stadiums and race tracks.
The ramifications appear to be endless with many still to reveal themselves. And in the midst of everything, Goldman Sachs gave its CEO, Lloyd Blankfein, a bonus oif $67.9 million last year. He did avoid the worst of the trouble, but isn’t this an excessive early Valentine? Defenders will tell you it’s the market, of course.
But it’s time to stop worshiping the market as the fount of all wisdom and apply some intelligent regulation to the problem. If Congress banned kickbacks to mortgage brokers and prepayment penalties that imprison people in bad loans, that would help. Legislation also is needed to mandate that lenders ascertain the ability of prospective customers to repay their loans, something prudent bankers always used to do.
Yes, we need the market, but not at the expense of the economy.