Subpriming the Common Good
Texas governor (right) stands by Countrywide founder Mozillo in the go-go days of subprime lending.
Do you remember that golden era when almost anyone could get a home loan?
If you don't, in the last year you've either (a) developed an extremely aggressive case of Alzheimer's, (b) turned one year old, or (c) both.
Blawgletter recalls the populist feeling that made subprime lending seem so very American and so terifically right. Poor people need financing for a first dwelling? Great! Middle class folk finally get to speculate in real estate? Awesome!
Subprime lending traded more risk against higher interest rates and bigger up-front charges. Lenders prospered, and most borrowers did okay too. Call it temporary suspension of disbelief, the essential element in our buying everything from Hollywood plotlines to Green Eggs and Ham.
But when real estate values began to fall, the whole ball of subprime lending yarn started unwinding. Loans kept closing and funding, but the lenders didn't get (nearly) enough compensation for their (rapidly) growing risk. Worse, watchdogs turned wilfully blind: Accounting firms continued to okie-dokie dubious financial reports. Wall Street kept on packaging the mortgages and selling them to investors. Rating organizations missed not a beat in putting their AAA stamp of approval on the securities. Even the federal government looked the other way.
We've reported on the litigation types that will likely arise from the subprime debacle. But we struggle most to draw breath at the lackadaisical attitude of those who swore to protect the weak from the failures and excesses of the market. By which we mean auditing firms like KPMG, PricewaterhouseCoopers, Ernst & Young, and Deloitte & Touche; ratings companies such as Standard & Poors and Moody's; and federal watchdogs, particularly including the Federal Reserve, the Securities and Exchange Commission and the Treasury Department.
Thomas Jefferson said that the best government governs least. He meant in part, we believe, that effective government works one heckuva lot better than the ineffective kind, thus making more government unnecessary.
Paul Krugman writes in his NYT column today about "Banks Gone Wild", lamenting the lack of accountability by those most responsible for the subprime crisis. He also points to "a pervasive loss of trust, which is like sand thrown in the gears of the financial system." Amen, Brother Krugman. Amen.
Barry Barnett
P.S. A November 24 article in The Wall Street Journal highlights that "Rising Rates to Worsen Subprime Mess".
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