Thursday, September 18, 2008

Stop with the Blame Already, Look in the Mirror

We have everyone all fired up now. Some financial giants have been struck down while others have been offered a helping hand. And just like the Oil Crisis, too many people act surprised this is happening. I'm just a dumass and I saw trouble and inconsistencies in our financial world back many years with the junk bond debacle and the S&L stupidity. There is something fundamentally wrong with a system that has allowed greedy people to topple it so easily and send the rest of us into a panic.

All this is happening way above my pay grade and brain grade. People supposedly smarter than I have allowed this stupidity to unfold. And now they ask for help. As much as I would like to tell them to pound sand, we have to step in to some degree to try and keep this from snow balling into something worse than it already is. AIG allowed to go belly up would have possibly made the situation worse. The fact that the "bail out" is a loan and not a giveaway indicates that no money will come out of my pocket in the long run. The pay back history of these type loans is good.

What I do not want to see happen as a result of this is knee jerk responses from our law makers. Stop gap measures maybe, but no changes should be made in the regulatory system without considering an overhaul of the whole system.

I read an interesting opinion from one Tyler Cowen. A kind of libertarian but not really, he contends that what we have now is not because of not enough regulation nor because of too much regulation, but more of a matter of not the right kind of regulation. He feels that over the years financial institutions have been regulated by a hodge podge group of rules coming from a hodge podge group of regulatory agencies. He goes on to say that some of the blame can be laid to the very regulations we have right now.

And then I read a comment by El Cerdo Ignatius while he visited another blog. It is very apparent this man has a better handle on all this than I do. So instead of reworking his words of how we could have avoided our recent stupidity, I will poach them and post them here -

"1) Loose or missing regulations in the financial industry. A few rules about how high a loan-to-value ratio can be when writing mortgages, related limits on mortgage insurance from Freddie and Fannie, and a prohibition on the resale of uninsured or sub prime loans to third parties (like AIG, Lehman Bros., etc.) would have avoided this entire bloody mess.

2) A culture that values consumption above all else. When the hell did it become the overriding goal to buy as much as possible, carry as much debt as you can handle, and forget about the goal of owning your home free and clear?"

I can't see anything wrong here. He places the blame where it belongs. In my lap. In your lap. In our lap. That these regulations were not in place makes his comments hindsight. But important hindsight for the future. Until we change our habits, we can expect no different from those who lead us or handle our money.

But what about the politics of all this? Seems to me both parties have much blame to eat here. Rather than focus on a financial system everyone knew had huge loopholes and dark pits in the future, these two sit on each side of the aisle tossing spitballs at each other these last 25 years. But that is what they do best. Sit on their hands until situations get to the point they have to do something. And as is most often the case, they over react and come up with badly designed solutions. And those decisions often favor a specific platform over the general welfare of the nation.

And to those who would continue to place all the blame in one party's lap or the other, get a fucking clue. It took all of us to reach this point. It will take all of us to truly correct it. Or you can continue to blame the "Obama-ites (aka the leftist liberal Democrats)" or the McCainicans and watch as more ineffectual and partisan leaning regulations come down. You can continue wasting more time venting your spleen in the direction of the guys on the other side. And in the meantime, our leaders will do the same as they figure out what to do that will position themselves the best for that next election.


El Cerdo Ignatius said...

Tyler Cowen... contends that what we have now is not because of not enough regulation nor because of too much regulation, but more of a matter of not the right kind of regulation. He feels that over the years financial institutions have been regulated by a hodge podge group of rules coming from a hodge podge group of regulatory agencies. He goes on to say that some of the blame can be laid to the very regulations we have right now.

Tyler Cowen is absolutely correct. The task ahead is absolutely monumental: the American system of mortgage underwriting needs a complete overhaul, starting nearly from scratch.

I probably, as I mentioned on my own blog the other day, should stop commenting on this issue, because it gets me angry to even think about it. Then I start ranting, and I am the type that really ought not to rant.

I think I was first horrified by how easy credit was (is?) in the United States when I visited Florida back in 1998. (At the time, I was an account manager for a Canadian bank.) On the TV in Florida one evening, an ad came on for a local bank. Dan Marino was pitching a loan called "The Debt Buster," whereby a borrower could get a loan up to 125% of the value of his home, using a mortgage on the home as collateral, in order to consolidate other debt.

Lord have mercy. Talk about asking for trouble. The very first thing I learned when I became a mortgage lender was that the single biggest risk factor for default on a mortgage is the loan-to-value ratio. Once it gets over 90%, the risk increases significantly: a 95% L/V mortgage is more than twice as likely as a 90% L/V mortgage to default. During my training, and for the rest of my career in banking, we never even discussed L/V over 100%, because no one could even contemplate such a situation.

Yet that's what QB Marino was peddling at the time. Not a debt buster loan, but a debt transfer loan (as in, transfer all your debt to another type of debt, namely, a subprime mortgage). Then, let's see... all of your credit cards have zero balances! And the bank which has assumed all the risk for your loan is left holding the bag. "Hey, one payment now! Much more affordable than before! Honey, I'm sure it would be okay if we charged this new [fill in blank here] to our credit cards. We owe nothing on them! Hahahahahaha!"

You know where it goes from there.

And bear in mind this: 1998 was well before the housing boom was noticed by anyone. It was before the NASDAQ meltdown in 2000. It was before subprime loans became as big a share of the mortgage market as they were. It was before these insane ARM's (pay just 3.6% for the first six months!). It was before Fannie Mae and Freddie Mac had to be bailed out. It was before AIG had to be rescued because it bought crazy subprime loans, packaged together, on the secondary market.

And yet, my reaction, almost eleven years ago, was one of horror.

I really should shut up now, but just a final point. Please do not feel as if I am singling out the United States consumer for my vitriol. I'm not. With few exceptions, most borrowers that came into my office in Canada during my days as an account manager (1995 to 2001) wanted to bite off more, sometimes much more, than they could chew. Most had to be held back, and shown the numbers, and given reality checks. The difference is that Canada has a regulatory system for mortgage lending and mortgage insurance that prevents an unreasonable assumption of risk to the financial institutions and the taxpayers. The system isn't perfect, and it has its fair share of unscrupulous lenders who do not give well-grounded advice to people wanting to borrow money. Like the banks in the US, many Canadian banks reward their mortgage salespeople in "up front" terms: there is a payoff, or bonus, or credit given when a deal closes. The higher the dollar amount, the higher the credit or quarterly bonus. There is insufficient payoff or incentive to a banker for acting in the best interest of his clients, other than moral well-being, if the banker happens to have any moral code. The difference is in the regulation: the conditions under which a mortgage can be written; the conditions under which one can be insured by the Canada Mortgage and Housing Corporation or by a private insurer; the limits on an amortization period (who ever heard of a 50-year amort?); the prohibition on the resale of uninsured mortgages on the secondary market; the absence of mortgages that underpay the monthly interest and capitalize the unpaid interest. In the past, we in Canada had a good old-fashioned adherence to treating lending as an art, not a science. Not long before than, American lenders did, too. Unfortunately, just about everywhere, it's become a science; and believe it or not, when lending becomes a science (i.e., the "lender" only has to fill in a grid with the right numbers or run the numbers through a program to see if the applicant qualifies), there are great gaping holes whereby mistakes are made. Sometimes the mistakes are the refusal of a credit application that would have worked out just fine for both parties. Other times, as we have seen recently, the initial parameters are so out of whack ("up to 125% of your home's value!!") that the result is a massive risk to the lender and none to the borrower, and eventually, default.

There I go again. I'm shutting up now.

Gary ("Old Dude") said...

Between the el cerdo post reference above, and MRMacrums post, I think everyone, (if they take a deep breath and be honest with themselves) can pretty much agree on this posts conclusions. I know I do.

We Americans need to need to start taking pride in being able to say "I paid cash ---", (in my family we were raised to believe if we couldn't pay cash for a tv, or car or everyday items, then we flat couldn't afford it. We learned to save and be careful how we spent our monies (not that we didn't sometimes makes mistakes, but we sure learned from them, but thats another story)---good post MRMacrum

Randal Graves said...

You're absolutely right, both parties are part of it. The Republicans push and push on their psycho CEO dream economy and the Dems say "why good sir, that's a fine idea!"

It's the same mindset that everyone had on and after 9/11.

"I never saw this coming, I never expected that screwing around in the affairs of other nations and pissing off parts of the world, knowing that you're pissing them off, might end up smacking us in the head in the future!"

gary hit on something about cash. Our youngest is starting clarinet this year and when we went to rent the thing, I was on hold off and on for at least 30 minutes in a desperate attempt to explain to the nice lady at the music store HQ that the reason they have no record of me paying on a credit card is because I don't have one and haven't for years.

I think she believed me to be from another planet.

MRMacrum said...

el cerdo ignatius - your reference to loaning being an art vs a science is well taken. That is one reason we bank with an independent local bank that knows us and knows the community we are doing business in. A long term relationship has been built that has taken the science out of the relationship and replaced it with mutual trust. Which I guess could be considered part of the art factor you point to. The ability to pay is one thing. The willingness to pay is harder to discern.

And no, you should not stop commenting. I have learned more from you and what I have researched because of your comments.

I do know that to panic and get on the phone with our IRA folks will do nothing. The market will recover. It always does. I just hope that when we decide to start punching holes in it, the cycle is on the Bullish side.

randall graves - Yeah, this willful ignorance that seems to have America in it's grasp would be a constant source of comedy, if not for the dangerous crap it gets us into.

Demeur said...

I would agree with most of this. When I heard the ads for 125% loans I thought only a fool would make that loan expecting housing to go up forever. It was that mindset that gave me the motivation to pay off my place before the collapse. However I must remind everyone that prior to this misadministration taking power the general policy was "pay as you go". Remember that? And this nation had a surplus that was quickly pissed away by the "conservative" party.
But the greatest issue I have here is the dumbing down of American education. When the focus is on passing tests then we'll have the best test takers in the world with little in the way of common sense items like daily living.
There used to be rules of thumb, basic truths to permit even the dumbest amongst us to get through life. Those are long gone and since no one will teach them anymore we are forced to add government agencies and complex regulation systems.
Randal it's important to have a credit card even if you don't use it. Try renting a car or motel room without one and they'll turn you away. Been there done that.

BBC said...

Can't fix any of this until it topples over. Then maybe it can be rebuilt properly.

Na, that is just a fucking pipe dream, mankind is not mature enough yet to get it right and will once again repeat history.

Anonymous said...

Have never been a big fan of collective guilt, Crummy. Has a real nasty history to it.

Blaming Main St., and especially Lower Main St. at that, for the sins of the Wall St. bankers and their Washington vassals is terribly misplaced and unfair in my opinion. Kinda akin of blaming Catholic altar boys for the sex sins of the Vatican.

It wasn't "the American consumer" who created this Wall St. Ponzi debt scheme that Washington is now about to offload onto .... onto the American consumer, aka the American taxpayer.

And no amount of sanctimonious preaching can whitewash what went down ... courtesy of Washington and Wall St.

MRMacrum said...

Demeur - The process of easy credit and loose dog financing has been with us for quite awhile. longer than just this administration's term. I do agree that it seems to have hit a real low point under the current administrations lax and irresponsible ways. We have become a consumer based economy that had no real support to maintain it at the level it has attained.

prestor john - I would have hoped you would think I was referring to adults and not children as being responsible for the events around them. Definitely not a fair comparison.

But you bring up an interesting point - collective guilt. Yes it has a nasty history. But does that make it totally invalid? Groups have to take some responsibility for the nastiness they allow to grow within their ranks. You mention the victimization that went on for possibly hundreds of years within a church and somehow let the flock who enabled it off the hook? No better example exists than our electorate sitting back and allowing less than a majority of us select the leaders that will run things for all of us. Is there not collective guilt found here that is well placed? Without due diligence by all of us, the path for losers is laid wide open.

Anonymous said...

Crummy, my comment about altar boys and the Vatican was about power relationships, and yes I do see it the same for us and Washington.

In my opinion there a ferocious institutional forces at play to prevent precisely what you and I want for our Country. In this regard I think bbc is far closer to it all, and my own view is quite similiar. Change ain't gonna happen. At least not real change. It's all bullshit. That's why in my more pervy political moments I really do want Sarah 'n McFool to win.

Oh, my sanctimonious preaching comment was not directed at you.

Granny Annie said...

This is definitely a bipartisan, hand-in-hand walk of greedy shame.

Snave said...

I have thought for some time now that our population has been lulled to sleep by television, entertainment, slick politicians. For many Americans, the comfort zone is pretty high. If there was something like the stock market crash of 1929 when everything went into the dumper and people were literally having to scrape to get by, there wouldn't be much the government or anyone could do to help. People wouldn't understand, and I'd think we would have all kinds of riots, maybe a revolution of some kind. We have gotten so tuned in to the material aspects of our lives that if that part was taken away or neutered, how well would America cope?

Thus I think this time yes, the government does need to come riding to the rescue. Yes, there needs to be some kind of bailout to prevent our country from disintegrating. Yes, there needs to be some extensive regulation in order to better prevent things from getting to this point again.

And like Gary says, individually we need to start taking more responsibility as a nation for our personal finances. My wife and I have been crippled by credit debt for the last decade, and there may finally be some daylight... that's because we no longer use the cards except in emergencies (which is how we should have always used them), and we are scraping by on a shoestring every month in order to make large payments to Mastercard and Discover. The situation sucks, but yes, some personal responsibility would have helped us not get into the situation for starters, and now it will have to help us out of trouble. We'll get it done, it will just take a few more years and it won't be painless. I am trying not to write checks at this point, just as Gary says, pay cash for whatever I can, whenever I can. And then when we get the debt gone I want to become an alien like Randal!

MrM., I think the willful ignorance thing is explained in the movie "Idiocracy". The film is crass and tasteless for the most part, and to me it plays more like a horror movie than a slapstick/lowbrow thing. It's about a future where America has been so dumbed down at all levels it can barely survive... but I think it actually IS funny, despite its dire premise.

Demeur is right about those rules of thumb that aren't taught anymore. When I was in high school some thirty-odd years ago, it seemed like all the female students and a number of the male students took "Home Economics" which was mostly a homemaking class, and many students took "Personal Finance" to learn how to manage one's own money. Those courses have long ago been stricken from the local curriculum. I don't know if other school districts have done the same, but I think such classes need to be reinstated, and possibly required for students to graduate high school. Home Ec and Personal Finance used to be elective courses way back then, and I took neither. I now wish I had bothered to do both as a teenager, because I know it would have caused me to look at financial matters more seriously.

But that's just me and MY finances. When I look at what I have not done and where it has gotten me, it gets me pretty ticked off when I see lenders taking advantage of people who don't yet understand what kind of trouble they can get into. I wouldn't go for any of that kind of crap now, but I might have 10 or 15 years ago.

BBC says "Can't fix any of this until it topples over. Then maybe it can be rebuilt properly." Reminds me of my beloved Seattle Mariners baseball team! Heh! But a good point is made. How could it all be rebuilt without forcing people through massive personal finance disasters? Something has to give at some point. Is there a way to phase in a new system as the old is being phased out? I do think change is going to have to come as gradually as it can, but as the situation gets more dire, how gradual can it be?

MrM. says "Groups have to take some responsibility for the nastiness they allow to grow within their ranks." Another excellent point made. This goes for all kinds of groups. If the Islamic world took more responsibility for the nastiness they allow to grow in their ranks, it would help the entire world. If American evangelicals did the same, there might not be quite as many people wanting to turn America into a theocracy. If our political parties did the same, we would have more civilized issues-based campaigns and debates. I agree Mac... I think that whatever group we find ourselves in, if we stand by and allow the nastiness to grow in our ranks and if we do nothing to stop it, we are as guilty of nastiness as those who we have allowed to become nasty. I think we can all do a better job. If that's a collective guilt thing, so be it.

I can't say I feel personally guilty for what has happened on Wall Street lately, though!

Anonymous said...

Good Christ Almighty, stop being so fukin civil while ya being raped.

This is Prester John and I approve this fukin message.

MRMacrum said...

snave - It really doesn't seem to matter how it happens. There is no doubt change is upon us. Ready or not here it comes. If we are lucky, with some cleverness tossed in, the transition to whatever we end up with will stagger in in phases and we might be able to keep up. Or the adjustments will be brutal and lives will be turned upside down.

I know I feel we all have our part in it, but that does not mean we should not fry a few CEO and a few political butts slowly over some fiery pit near Buffalo or maybe in Jersey somewhere. The advantages taken are exactly as prester john says, rape with malicious intent.

Yeah, the govenrment absolutely needs to intercede. I sure hope the boneheads even get it close to right.

What we should be doing as individuals will be taught by haed knocks. Those of us who pay attention and tighten our own ships have the best chance. But I bet most of America lives through one kind of financial nightmare or another before this is through.

prester john - Well, we have already been pilliaged. Might as well complete the circle and get right into the rape part. Although not ever have been gang raped like it appears we are in for, I may be underestimating the negative vibes I will end up with as I pull up my pants. Was that too civil? Or too harsh? I am so confused. I don't want to forever scar the occaisional little tacker who might wander by with coarse and vulgar narrative. But these are vulgar times aren't they? ;)

Anonymous said...

No personal insult intended, though I do see how it could be interpreted as such.

A general apology to all, and to snave in particular.


(Crummy made me say this.)