Congress' Response to the Mortgage Mess

Eric Sevareid once remarked that a "chief cause of problems is solutions."

From a libertarian perspective at least, I suspect that we will find "problems" in the "solutions" that Congress will enact to solve the sub prime mortgage mess. At this point it seems inevitable that the current Congress (and, even more so, the one that will likely sit in 2009) will be moved by heartrending stories of foreclosure of citizens’ residences at the hands of mortgagees who have charged excessive rates, misrepresented the terms of the loan and induced the debtors to take on too much debt.

It seems certain that Congress will allow stripping down of mortgage liens in bankruptcy. Doubtless Congress will try to shackle mortgage brokers with expensive certification and criminal liability. It may also go beyond abolition of holder in due course status for mortgage note holders to force persons in the chain of title of the notes to bear some of the credit loss that occurs when the debtor defaults. If Congress can find a way to do it constitutionally, Congress may also mandate some form mortgage modification. Congress might even take up my friend John's foolish idea that lending too generously be a tort. Congress will justify the legislation by anecdotal testimony in televised hearings from pitiful wretches who knew not what they were doing.

If my lugubrious predictions prove true, there will be a measurable--possibly quite large--impact on the market. Such rules will make mortgage lending less profitable to everyone in the system-so the number of mortgages written will decline and those that are written will be marginally more expensive. It will winnow the number of mortgage brokers and so remove some who have committed fraud in writing mortgages. It will make investors upstream think twice about buying a debt that carries not only a fraud claim but also the possibility of tort liability for too generous lending, and even a lasting stain (for debt liability) that cannot be removed by assignment to another.

I am quite clear about what Congressman Paul would do to solve this crisis- nothing. He would note that the interest rate on 30 year mortgages in late January 2008 was lower than any time since mid 2005. He would point out that many mortgage brokers have gone into bankruptcy and that the gushing market for mortgaged backed securities has gone dry. He would point out that Countrywide rewrote more than 83,000 mortgages to alleviate pressure on its debtors in 2007 and that it expects to modify even larger numbers of mortgages this year. In short he would argue that Darwin's rules are already at work and that, left to itself, the market will cure the excesses that we have observed. In his view adding harsh legislation on top of the market's Darwinian response would cause the number of home loans to decline well below the optimum number.

By now you will have understood that I am sympathetic to the libertarian position, and I wonder whether the debtors' friends in Congress have a covert agenda, namely to keep those with poor credit from taking on debt even when these debtors are fully informed of the risks and costs and quite willing to bear them. To protect consumers from fraud is worthy, but is it worthy to bar an informed consumer from economic behavior that Congress thinks too risky? What do you think?

Comments

[John Pottow]

Can we rely on the market alone to sort this out? I'm not so sure, and I worry that the market got us to where we are in the first place. So yes, the market corrected in the 30s, but a lot of people jumped out of windows. (And think of the inefficiencies and negative externalities of all that damaging shattered glass.)

The dislocation costs are serious with waiting for the market to shake out. But even leaving aside those problems, I wonder what is the objection of having certification requirements of the sorts in H.R. 3915 -- that lenders certify they've done an ability to repay analysis. (After all, if they're prudent lenders, they've done this already, haven't they?, so all it does is kill a few more trees.)

I get nervous when car makers say that adding seatbelts will increase costs, which will have to be passed on to consumers, and hence price some safe drivers out of the market. I also note that we don't have to suffer the parade of horribles Jim frets over. (E.g., I gather H.R. 3915 would cap recovery to loan forgiveness in its private enforcement provisions and bar affirmative damages.)

Lots of times when markets don't work well, we step in to regulate. And yes, regulation necessarily impinges on the liberty of those who don't "need" it. I guess I fall into the category of a careful driver who doesn't begrudge wearing a seatbelt, and I wonder whether the hypothesized marginal driver who is priced out of the car market is more a lobbying bugbear (albeit animated in economic theory) rather than a real concern.

[Jared Light]

The market was not allowed to sort anything out in the 30s, and the Great Depression was an almost entirely artificial contrivance brought forth (initially) by absolutely stupid trade policy and even worse monetary policy. Here (http://www.mackinac.org/article.aspx?ID=4013) is a great article on the real causes of the Depression. Even if you don't agree with the entire article, there is much to glean from history in terms of handling the currency.

While it may be overstating the danger, the moves to regulate the lending industry could be disastrous in the long run. It would severely hamper the ability of many people to obtain loans, and consolidate the mortgage industry even more than it is now. Fraud needs to be prosecuted, but to give undue blame to the mortgage industry is ridiculous.

I think everyone, on both sides, are learning their lessons. No one will give out a sub-prime loan anymore, as there is now no profit in that, when people don't pay their loans.

Education on the topic is important. There are so many people that don't know anything about personal finance, they are easy pickings for bad loans. It would be nice to be able to stop this, but for all that politicians talk about helping the middle class, this type of move would hurt the middle class the most.

[Andrew Mackenzie]

John: I can't disagree with you more - this is exactly the kind of thing that we should let the market sort out. This was a breakthrough that people w/ sub-prime credit were allowed to make these kinds of financial bets. The story you don't hear about are the ones who have finally been able to buy houses - Anytime you take out a mortgage, you are making a financial bet based on your ability to repay. If you be badly or too riskily, yes you lose your house and could wind up crying on the cover of Newsweek, but that doesn't mean that we should come in and bail you out, just cause it was your house. Should we cover people for their speculations in stocks that go bad? Vegas gambling losses? I think not, betting against the market gets VERY expensive VERY quickly.

James' point that you completely missed was that a "solution" to this is bound to cause tons of unknowable problems in the future. If you have moderate credit, do you want to be able to buy a house in the future? You might not be able to . . . in the 60's, it was REALLY hard to get a loan for these people.

It's just a question of whether you want to have a nanny state country, or a country where people are treated like reasonably responsible adults. Even reasonably responsible adults screw up at times - when they do, it's not our job to catch them. If you do, they don't learn they shouldn't take risks like that.

--Andrew

[John Pottow]

Andrew (and Jared), I'm more sympathetic to your views (and Jim's) than my comments might convey, but I truly wonder whether this is different. I agree, we don't (and shouldn't) generally bail people out when they lose money in the market, but if things go "too far," or if consequences are felt systemically, then don't we do so then? Isn't that what the Fed cutting rates to shore up the stock sell-off was all about (actually, to be precise, they started just by injecting some liquidity into the lending markets first as I recall). So are we into an exceptional situation here?

[Andrew]

I'm all for doing something systematically - IE using the system we have to avoid a depression, but dealing on a macro, non-judicial solution - IE cutting rates, etc. There was an excellent editorial in the WSJ about this the other day - basically saying things look bad, but we don't need to go into a recession - look at the Irish - their economy was TERRIBLE forever, and then they took some baseline financial steps (Cutting taxes, limiting corruption, etc.) and they've been more or less sitting pretty since they did, but they had to focus on what was good at the Macro level, not over analyzing, focusing on the micro and pulling a Jimmah Carter - we all saw how well that worked.

[Jon]

I agree that contemporary lending innovations made a lot of credit available to a lot more people, a lot cheaper, and that this is a good thing. I also agree that, in general, nobody should insert themselves in a deal between two informed persons for the sake of protecting one of the two. (I'd say always, but then I think of whether I'd stop a friend suffering a midlife crisis from, say, getting a tattoo, and then I'm not so sure.)

That said, there are two points I can think of that you may want to address further.

First, there's a not-insignificant chance that these financial innovations will lead to a recession, inflicting potentially great harm on people who had nothing to do with exotic mortgages. The only way to prevent another systemic crisis may be through regulating individual choices, in which case it's not clear that individual choices always win.

Second (and relatedly), while it's probably true that the market has corrected (or overcorrected) itself for its excesses, this alone is no guarantee that investors have learned their lesson. Every speculative bubble builds by investors believing the price of some asset class will increase indefinitely and dramatically, whether it be real estate, Internet stocks, or tulips, and every such bubble has popped eventually. There is no free lunch. But investors haven't learned that lesson yet, so who's to say they'll learn this one. (also, on market corrections, there's the perennial point that market corrections generally occur in the long run, by which time we're all dead.)

[Kevin]

I think many of your predictions are overly dire, to be extremely polite.

I'm going to go so far as to say that "overly generous", sloppy, or otherwise boneheaded lending practices will never be a tort.

And I'd go further to state that the absolute largest possible reaction would be some relatively minor oversight that some businesses would bitch about, but would actually incur exceptionally low cost.

I prefer a hands-off market, but this post reads like an overwrought fantasy, rather than anything like legitimate concern. Especially since it includes the extremely disingenuous stat from countrywide where they refer to deed-in-lieus as foreclosure avoiding rewrites.

[Steve Rhode]

Bailouts and fixes by government for inept underwriting and lending does not seem like an appropriate solution and in fact only reinforces the bailout mentality for business when they screw up. For example, look at the Northern Rock mess in the U.K. where the government has committed upwards of £50 billion of the tax payer money to keep the bank afloat.

This crisis was not brought about by a massive wave, blotting out of the sun or an atomic bomb. This was simply stupidity and greed that should be internally fixed by the market.

Personally, what I'd rather see are more effective solutions for all people when they run into financial troubles, in general. A comprehensive solution that treat debtors individually, with protection and outside of bankruptcy would go a long way to helping people moving forward than just a knee jerk reaction to this situation.

What's next, something crazy like giving people $145 billion to go shopping?

Steve

[Jeff]

"It seems certain that Congress will allow stripping down of mortgage liens in bankruptcy."

How did the anti-strip down mortgage provisions in chapter 11 and 13 ever get into the Code in the first place? Corporate lobbying by lenders. They have no place in the Code as they treat one creditor better than other creditors. Why would a libertarian defend this corporate hand out? Is it OK to a libertarian perspective for corporations to get such hand-outs, but taking them away is part of a liberal "covert agent"? Seems to me a libertarian would reject such provisions, and would be happy to see them gone. What are you really defending?

[Allan]

IMHO, the problem here is not with borrowers. Not even the borrowers that committed fraud. The problem is with the lenders. They have the money and they have the power. They chose to lend money to individuals who could not pay the money back.

Not that I have that much sympathy for those who took the personal risk to buy and try to guess the top of the market.

The ones I have sympathy for are the stockholders of the companies (and funds) whose equity is lowered because the companies invested in inherently risky products. AAA rated investments, were not AAA. Who let the raters get away with this? Individuals were allowed to take out "liar loans". Who let them?

The market failed.

The "solution" is more complicated. One set of people would say that the market failed and so be it. Let it fail and let's get on with business, because it is unlikely to happen again. Another set of people would say that the government failed to regulate properly and the government needs to fix the problem.

I say that those who made profits on the backs of others should be forced to disgorge the profits. That is, those who allowed the system to get to this state should bear the brunt of the costs. Otherwise, let's just get on with business.

Yeah, I probably lost 10 to 15 percent of my retirement fund in the past month. But it will come back. Life will go on.

[Linden]

Always missing from these conversations is the fact that many, if not most, subprime mortgages were home equity loans, pushed hard through unsought direct solicitation. Low-income people who already owned a home were the targets. They weren't seeking to buy a home, or live high on the hog by buying a second home. Instead, they were approached by brokers and encouraged to use their homes as ATMs to make long-delayed repairs, pay off credit card debt, help put their grandchildren through college, and so on.

Home ownership increased from 64% in 1994 to 69% in 2004 -- hardly stunning considering all the mortgages made during that time, and due for a contraction back to around the same level. The subprime phenomenon has mainly been a vehicle for some people to strip other people's equity and dump the social costs onto the government and taxpayers.

[Allan]

Linden,

The homeowners you mention were not good credit risks. First, because they did not have the money to pay for the loans. Second, because the mortgage brokers were getting a big paycheck.

Were I a lender, I would not have made the loans, because the risk was too high (even with the high interests that was attached to the loan).

The lenders were enablers. Sure, the brokers were wrong, but they could not have done what they did without the capitalists. And the capitalists shot themselves in the foot.

(BTW, these mortgage brokers, if we can figure out who they are, should also be compelled to disgorge their profits).

[Mike Dillon]

From personal experience and research, and in hearing from other "victims" like myself on at least a weekly, sometimes daily, occasion I have to agree with everyone so far - at least in part. That said, I'll be boning up on H.R. 3915 this week. My personal preference, I'd love nothing more than to see H.R. 3837 pass as it was written.

Should there be sweeping governmental overhaul of the mortgage industry? I don't think so. Should some "fine tuning" of existing regulation take place? Absolutely. Is everyone in the food chain complicit in this massive breakdown of the economic machine? To varying degrees, I'll stipulate yes but I'll qualify that by stating that, with obvious few exceptions, borrowers are on the low end of the blame spectrum.

Americans want a piece of "the Dream." Far and wide, owning a home generally signifies a certain amount of dignity, prosperity and security. Which one of us doesn't want that for ourselves and/or our families? The problem that caused this entire scenario is simple, unadulterated, greed - cue Gordon Gekko. In the grand scheme of things, borrowers had the absolute least to gain in this fiasco. The majority of them bought a home - or the ability to use an existing home's equity for whatever they felt was beneficial to them. Whether it was or not would have to be studied on a case-by-case basis.

However, over the last five or six years, the entire professional side of the mortgage equation - mortgage brokers, lenders, RE agents, appraisers, title companies, etc. - was having money shoveled at it in a manner that probably very few in those ends of the industry had ever seen. And it was easy to overlook little things like lending guidelines because the Mercedes, Rolex, Bel-Air home, yacht and, dare I include, college tuition fairy had to take to making twice-daily cash deliveries in order to keep up with the financial flow.

Unfortunately, that in turn, allowed for other little things, like regulation and enforcement, to fall by the wayside and be effectively trampled in the stampede. As previously stated, "fine tuning" of the machine absolutely needs to happen. But it does absolutely zero good to tune it at all if it's not going to be used in its full capacity. There are already a wealth of regulations and laws on the books in this country designed to allow for the fair operation of the mortgage market. The only problem with that is that, as we have been witnessing for some time, the market has been operating FAR away from anything resembling even remotely closely to "fair".

Regulation and enforcement were thrown overboard and accountability was keel hauled shortly thereafter. All the laws in the land will do us absolutely zero good if only a small, select portion of them are enforced per the personal whim of any given regulatory entity, enforcement authority or judicial end of the line. FORTUNATELY, we are beginning to see at least SOME bright spots shine through.

Federal courts are at least beginning to acknowledge that that deck has been severely stacked against borrowers and are finally beginning to put some stop gap measures in place to restrict the bloodletting. Unfortunately, there is much more to come. But with any luck at all, sunlight will be allowed to be the disinfectant that is has proven to be time and time again. As nothing more than a homeowner/consumer with just enough knowledge to consider myself "dangerous”, I firmly believe that Professor Porter's "Misbehavior" study has been a significant catalyst in that process.

We don't need sweeping NEW legislation to help see us through the darkness of the next few years. What we need is unequivocal, immediate and relentless across-the-board enforcement of EXISTING federal and, in many cases more importantly, STATE legislation in order to significantly staunch the flow. We have to be able to acknowledge where the problems occurred and hold those of us responsible for this epic debacle RESPONSIBLE and, more importantly, ACCOUNTABLE for the massive chaos and destruction that they have caused. After coming as close to financial disaster as they are, and taking the rest of the United States and possibly several other countries with them, does anyone REALLY think that corporate entities have any right whatsoever to be handing out golden parachutes?

Example: Countrywide has had a finger pointed at it for some time now as one of the larger "problem" children involved. And yet, after making roughly $127 million from stock sales over the course of last summer, does Mr. Mozilo really DESERVE the additional $100 million from the sale of the company to Bank of America? Why not hold those at the helm of the big underwriters, securitizers, servicers and everyone in the chain of command, responsible for what they have collectively accomplished? Why not charge them with fixing the problems that they have created in this country instead of punishing the very people, the homeowners that were sold a bill of goods and the investors who were sold the SAME bill of goods only better? Not even being educated enough to play an attorney on TV, I believe the phrase that I'm looking for is "disgorgement of ill-gotten gains." Those with the appropriate knowledge PLEASE correct me if I'm wrong - anywhere.

The bottom line is that until the multitude of problems are actually acknowledged and addressed and the appropriate parties held accountable for their actions and held responsible to those that they have decimated in the process, appropriate and necessary change will not be effected. I have not problem one with anyone making money anywhere in the mortgage process. I do, however, have a HUGE problem with anyone making money at the financial, and oftentimes, emotional, physical and psychological expense of those somehow less fortunate, less intelligent, less informed or more trusting because they are led to believe that they are being looked out for when nothing could be further from the truth.

There is nothing wrong with wanting "more" for ourselves. That is an integral part of the "American Dream." What IS wrong is wanting too much and simply taking it at the expense and without consideration of others. We have systems in place in the United States to supposedly protect those less fortunate, less informed, "unsophisticated". It is time for those systems to do what they were designed to do – collectively protect the American people and all of the rights afforded them in this country. And the time for those systems to begin working is now. We don’t necessarily need “new” laws and regulations to protect us. We need the existing ones to be upheld without regard for or at the influence of any special interests. Collectively, we made this bed. It’s time to flip the mattress and start working on the lumps.

[Doug]

Mike -

I don't disagree with any of your points about the culpability of those who subverted existing rules and legislation to enable risky loans to be made and subsequently resold. These folks deserve to be held accountable for their role in the crisis.

I do take a lot of exception however with your blanket exoneration of the 'borrowers' from their role in this crisis. Just as ignorance of the law is no excuse for a crime, ignorance of ones own financial resources and ignorance of the terms of a contract is no excuse for signing a mortgage that you can't pay. Making exceptions for gross fraud (double-documents and such, which is only a small tip of this iceberg) borrowers simply shouldn't be allowed to say, 'I didn't understand, he told me it would be OK' and have their debts go away. It's typical of the climate of the US at present, that we be unwilling to hold people accountable for their bad decisions, but it isn't good policy, it doesn't make good law, and it doesn't create the need to be INFORMED. It's wrong for the government to divert tax dollars to failing businesses (auto, airline, S&L) and it's wrong to divert it to the too-uninformed (borrowers). Why? It allows for mis-pricing of risk in the marketplace, and creates no incentive to change behavior.

[N]

Reading these posts, it seems that nobody here has ever had any trouble getting a loan or proving income. As someone who was self-employed in my early twenties, I have. I had a steady income, lived well within my means, and had excellent credit. When my car broke down, I needed a loan to get a new car so that I could get to work. Nobody would lend to me. I didn't go to every bank in town, but I went to enough to get the general picture--I wasn't going to get a loan without at least two years' tax returns showing adequate income. I had tax returns from the two previous years, but because one only reflected 6 months of income (following my graduation from college), that wasn't good enough. I have several friends who went through similar difficulties getting loans for cars and houses--i.e., they couldn't get one. These were people who had never missed a payment on anything in their lives.

Sure, this is just anecdotal. But before you jump on the bandwagon asking for more regulation and tougher standards for getting credit, remember who you are trying to help, and how many people are hurt when they can't get a loan.

[Mike Dillon]

Doug,

I don't disagree with you at all. Some borrowers simply did not have enough financial savvy to understand what they were being told. The problem starts, though, when borrowers walk into a broker's office with the impression that the broker is going to be looking out for their best interests. Hopefully, everyone has been caught up to speed on that by now. And if nothing else, somehow, there SHOULD be some form of borrower "education" requirement by third party entities *outside* of the mortgage industry.

Unfortunately, bad things happen to good people. And yes, foreclosures are a part of the real estate reality. But, to the best of my knowledge, and anyone feel free to correct me as I fully admit that I have limited knowledge here, the issues that are now causing such global financial damage had no way of existing until the advent of mortgage backed securities. When brokers and Wall Street became involved in the process more and more people began waking up in hand baskets wondering why they were so warm.

My particular focus has been and continues to be Mortgage Servicing Fraud - hence the focus on the Street. But as a result of the small circles in which I travel, I get to hear about all kinds of mortgage related issues from borrowers. Each situation has to be scrutinized individually to determine whether they're dealing with mortgage fraud on the parts of both the borrower and the broker/originator, predatory lending, mortgage servicing fraud or just plain bad luck or mismanagement on the part of the borrower.

One of the most common lines that I've heard borrowers tell me is the old "Let's get you into this loan now and in two years we can refinance you out of it when your credit is better." 2/28 exploding ARM pitch. Borrowers bought the line because it sounded plausible to them and it got them into the property they wanted at a payment that they could afford. Should the majority of them not have taken the mortgage? Possibly, possibly not. Only way to know is to look at each individual situation. The problem that jumps out at me is that that particular line was apparently used as frequently as it was and that some of those ARM borrowers apparently could have afforded a fixed rate loan - but were stuffed into an ARM because the brokerage made a higher YSP or otherwise made out better on the commission at the expense of the borrower.

Some borrowers should, unfortunately, end up going through the foreclosure process. And some should, unfortunately end up losing their properties - if everything was done correctly and above board during the origination process. But at the same time, there is a reason that the term "least sophisticated debtor" exists and it is when those individuals are unfairly taken advantage of that I take issue.

Personally, I think that that the servicers are escaping far more of the credit/blame for the current situation than they deserve to but that's only my suspicion. Of course it doesn't hurt that they have a Democratic presidential candidate and an army of industry lobbyists helping to shield them from liability. But what do I know, I'm just a borrower fighting an illegal foreclosure. ;)

[Doug]

Mike -

A quibble and a question:

The quibble - your refer to a sales pitch like '"Let's get you into this loan now and in two years we can refinance you out of it when your credit is better." 2/28 exploding ARM pitch' as the PROBLEM with how loans were sold. Maybe I'm just optimistic about what borrowers can (should) understand, but I'd think that "There's no such thing as a free lunch" is knowledge that many, and maybe even moreso the less-financially-secure, would know quite well. I'm still stubbornly refusing to believe that people got 'stuffed' into ARMs against their will. People say 'No' to sales ptiches every day - and every 2.2 seconds if they don't have a good spam filter - that's why I struggle with this line of reasoning.

My question - how DID these mortgage-backed securities end up priced (and purchased by sophisticated buyers) as relatively less-risky than their now-obvious risk levels? Was it the diversification? It seems to my poor little brain to be a gross error in analysis, but I don't want to unfairly use hindsight here.

[Mike Dillon]

Doug,

I think part of the problem with the "ARM pitch" lies simply in the fact that the vast majority of borrowers did not - at least up until now - realize that the brokers had no reason or duty to look out for the borrowers best interests. The trouble that we're seeing now as far as ARMS are concerned (which is fairly far as ARMS pretty much equal "subprime") is that everyone made it through that initial 2 or 3 year period and, for whatever reason, didn't or couldn't refinance favorably in time to escape the resets. What I'm hearing is that part of the reason behind that was the prepayment penalties of several thousand dollars that boxed borrowers out of refis. And yes, some of those borrowers say that they never realized that they even HAD prepayment penalties so it CAN be said that some borrowers simply aren't reading or comprehending what they are signing. But when was the last time anyone was allowed to feel like they were actually ABLE to sit at a closing table and actually read what they were signing? Sing here, here, initial here and here, sign here, here and here. Date this, this is your copy, sign here and here and you're done and out the door before the ink is dry. And it's at that point that people usually realize that they now "own" a home and have to start thinking about moving in. And that takes care of the three day right of rescission because people don't think to go back and re-read everything that they signed. And that is what lenders bank on. Personally, if I ever choose to mortgage a property again in my lifetime, it will not be done without the full scrutiny of and authorization of my own attorney. Never.

Think about the process for a second. 1.) X decides that s/he wants to purchase a home. 2.) X contacts a RE agent and says "I want to purchase a home." 3.) RE agent takes X out to look at properties in a price range that X and the agent feel X can afford. 4.) X finds a place to call "home" and makes an offer. 5.) if/when the offer is accepted X THEN goes looking for financing. 6.) X finds out that the only way s/he can afford the property that s/he wants to call "home" is if s/he takes an ARM loan. Whether X qualifies for a fixed rate or not is never disclosed to X because Broker A never tells X that s/he qualifies for a fixed rate loan because Broker B makes a greater commission on the ARM. 7.) X is now faced with the decision of a.) walking away from "home" or taking an ARM out that s/he can afford for the next two years but will have to refinance at/before the reset.

Now, you and I know that #5 should come before #2 in that scenario as it really only makes sense to find out how much house you can realistically afford BEFORE you go shopping. But sadly, I think that very few people realize that. They want a new place to live and go looking for what they WANT as opposed to what they can AFFORD. And a broker tells them that if they take the ARM they CAN afford what they WANT. And thus begins the slide down the slope.

As far as how the RMBS were priced? That, unfortunately is a question for people with better education than myself. However, from what I've read and understand, the ratings agencies - Fitch, Moody and S&P - all had hands in the process. Of course, I've never been able to understand how it is possible to receive an OBJECTIVE rating on anything when you pay for said rating regardless of whether it's paid for up front or on the back end. I'm told that it IS possible - I just haven't seen any proof to make me believe it yet.

[jm]

A great many innocent bystanders have been injured by this:

1. Families with children in areas where there was a dearth of rental housing suitable for a family (because the tax laws and other factors have made it "The American Way" to "rent from the bank", and because speculators were taking rental homes off the market to remodel and "flip" them), who had to choose between renting unsuitable quarters or buying at ludicrously inflated prices (with the additional psychological pressure that if they didn't they might be "priced out forever" -- almost every big-shot economist in the nation, up to and including Bernanke, was averring that the prices would never fall, that the best someone wanting to buy their first home could hope for would be that they might stop skyrocketing for a few years).

2. People who already owned homes they bought at reasonable prices, with reasonable mortgages, in neighborhoods were at the time safe and stable, but will be ruined by the tidal waves of foreclosure to come.

3. People whose pension funds will have been ripped off by the managers having been compelled to buy junk CDOs etc. because they were rated AAA and paid higher interest than safe alternatives, lest they be terminated for "underperformance".

4. People (and pension funds) who hold their savings in safe CDs or Treasuries, whose yields will be suppressed by the Fed having to slash interest rates to negative real levels to prevent the economy from falling into a deflationary depression.

And we have no way at all to claw back the bonuses that all the wheeler-dealers paid themselves based on the illusory "profits" created by their frauds.

[Allan]

JM,

Your last (unnumbered point) is interesting. This seems to be an argument for higher marginal tax rates. If the marginal tax rate for earnings of, say, more than $300,000 were taxed at 90%, we would not need to disgorge much of the profit. This rate would have to apply as well to capital gains in order to work.

I am not sure this is the best solution, as it would likely be detrmimental to the rest of the economy, but it would solve one problem.

[Mike Dillon]

Allan, if that happens, yacht sales are going to drop through the floor. What, in dog's name, did the yacht industry ever do to you to warrant such a provocative proposal? ;)

[Doug]

Some interesting info to answer the 'how did these CDOs get to where they were' question at the link below:

http://nplusonemag.com/hedge-fund-interview.html

Search on "Black boxes" to find the appropriate section