Dallas, TX –
"The market made me do it." That's what some lenders are telling us about the crisis they've created that's reverberating now in from Asia to Europe. Hysteria even hit the Federal Reserve, which dropped its measured demeanor and slashed interest rates by three-quarters of a percent, the largest single cut in 26 years. This was announced at 8:30 in 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, some banks 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 subprime loans were made to people who qualified for a regular 30-year, fixed-rate mortage, but instead lenders took them in the other direction, and took them in. Why? Because there was more profit to be made in subprime 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 subprime tar pit.
Now come the bond insurers, who also bit from the poisoned apple of the subprime program, guaranteeing some of the funny paper sold last year. Ambac, the second-largest bond insurer, has lost its triple A credit rating from Fitch Ratings, and MBIA, the largest bond insurer, is under review, along with Ambac, at Moody's Investors Service. The trouble here lies not only in the commercial bonds they insure, but also the municipal bonds, 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 though the Financial Times reported that investors already have taken that into account. What's going to fall has fallen. 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 and hospitals, some of which are under siege from rising costs.
The ramifications appear to be endless. And in the midst of everything, Goldman Sachs gave its CEO, Lloyd Blankfein, a bonus if $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, which prudent lenders used to do.
Yes, we need the market, but not at the expense of the economy.
Lee Cullum hosts the monthly series C.E.O. on KERA 13.
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