Seth Myers made a joke on Saturday Night Live this week about banks spending half of the $700 billion stimulus bill to build the world’s biggest toilet, which they would then use to flush the rest away. He’s onto something.
While cities like Cleveland face urban blight from massive numbers of home foreclosures and spiraling unemployment, executives of banks looking for bailout money are refusing to reveal their compensation packages. Something is wrong here.
Mortgage servicers foreclose on properties because with securitized loans, it is often more profitable than renegotiating the loans. These businesses risk finding their books loaded with vacant and quickly depreciating real estate. Holders of mortgage-backed securities would do well to accept some of the losses voluntarily, lest they find themselves holding worthless paper or the deeds to large tracts of urban wasteland.
A story in the New York Times last week titled, “The Deal That Legitimized Subprime,” discussed the entry of financial giant HSBC into the subprime lending market in 2002. Far from legitimizing such lending, HSBC merely joined a feeding frenzy of predatory lenders. Now the bank realizes that people who do not actually qualify for huge loans cannot pay them, and tend to default. CEO Michael Geoghegan says he wishes the company had not bought into the market seven years ago. No kidding. Now that the carcass is picked clean, the piranhas are sorry they killed the cow. So is the cow.
The funds from the Troubled Asset Relief Program (TARP) are evaporating faster than a June snowfall, and the holders of those so-called “toxic assets” are clamoring for more money. They will continue to ask for and receive more until somebody gets the political will to decide that it is acceptable for those who played casino capitalism to lose money.
No one wants to leave investors who bought bad securities holding the bag. Imagine allowing investors who made bad decisions to bear the responsibility for those decisions. The idea is downright un-American. A few Republican senators have hinted that some big banks might be allowed to fail. This seems like an idea that is ripe for exploration. Let the holders of toxic assets have what they bought, and let the zombie banks die a natural and timely death.
No one goes to the track hoping to pick the wrong horse, but a lot of people have to pick the wrong horse for others to win. Those who pick the wrong horse never successfully plead that they have just spent their life savings and get their money back. The financial market was not intended to work like betting on horse races, but investors have often looked at it that way. In truth, the subprime mortgage-backed securities scene was more like a game of Old Maid. However, now the game is ending, and the losers are unhappy. The economy is in trouble because these investors are not willing to let the game end.
If investors feel they were duped by those who sold them securities that were less than secure, they can take their case to a judge. Chances are that judges will find that investors were looking for no-risk investments with astronomically high yields. Such investments do not exist and probably never will.
If judges find that sellers of mortgage-backed securities were guilty of failing to disclose the risk, then the investors can get back whatever money the scoundrels have not yet spent. But the American taxpayer should not be burdened with keeping robber barons in the style to which they are accustomed.
It is time for the business community to acknowledge that not only is it bad form to rob poor people, it is immoral to rob anyone.
Goodman, J. David and Brian Knowlton , “GOP Senators Say Some Big Banks Can Be Allowed to Fail” New York Times, March 9, 2009. http://www.nytimes.com/2009/03/09/us/politics/09talkshows.html
Kotlowitz, Alex, “All Boarded Up” New York Times, March 8, 2009. http://www.nytimes.com/2009/03/08/magazine/08Foreclosure-t.html
Geanakoplos, John D. and Susan P. Koniak, “Matters of Principal” New York Times, March 5, 2009. http://www.nytimes.com/2009/03/05/opinion/05geanokoplos.html