WSJ commentary on personal accountability

gibby2015April 12, 2008

For anyone who has time to read this commentary from Friday's WSJ opinion page, I'd be interested to hear others' take on this idea.

Our Financial Bailout Culture


April 11, 2008; Page A17

Last week's congressional hearings on the Bear Stearns "non-bailout" were fascinating, and frightening. Our leading financial regulators said the Federal Reserve's unprecedented action was necessary to ensure the stability of financial markets, which would have melted down had nature taken its course.

When asked by the committee if opening the Fed borrowing window for investment banks (which was done later) could have saved Bear, New York Fed President Timothy Geithner responded that "We only allow sound institutions to borrow against collateral," thus implying that Bear was not sound. That raises the question of when Bear became unsound, especially in light of the public statements about the company's strength by their CEO only days earlier. If Bear was undercapitalized and overleveraged, shouldn't red flags have gone up long before?

Sen. Jim Bunning (R., Ky.) asked the regulators how the solvency of a single financial institution could threaten to bring the entire market to its knees. The regulators' reply was to hang their heads and pledge more and better oversight.

In a bear market with losses looming for investors, homeowners, financial services executives, homebuilders and the average stretched consumer  the hue and cry for the government to save everyone is reaching a fevered pitch. Even avowed capitalists who enjoyed the benefits of bull markets are now advocating government intervention. Government officials need little prodding to respond, and so the process of increased regulation has clearly begun.

Every day comes news of the increasing creep of the public sector. State governments, frustrated by the impact of the housing crisis on tax rolls, are implementing laws to stall or impede foreclosures. The Federal Housing Administration, granted (along with Fannie Mae and Freddie Mac) a huge increase in its loan limit, is now close to making the increase permanent.

The unstated premise is that, with better government oversight, we would not be suffering today's bear market and financial chaos. Of course, during the previous outsized boom, no one was calling up his congressman to complain that home values were appreciating too quickly. Meanwhile, they drained that appreciation regularly through refinancings to pay for vacations, new cars and other pleasantries, all of which created the prosperity for which politicians were pleased to take credit.

Leverage  and the rapid creation of dollars  fueled the boom we all seemed to love. But leverage cuts both ways, accentuating the benefits of a bull market and the pain of a bear market. The lesson we all must take away now is that leverage is not a one-way path to wealth with no risk of loss.

There is little doubt that if Bear were to have ended up in bankruptcy, the ripple would have been felt wide and far. Perhaps the most extreme and best example are the defaults that would have occurred on Bear's overnight borrowings, whereby they pledged collateral, much of it mortgage-backed securities (MBS), as security. Many of these loans were held by (short-term) money market funds, funded ultimately by people like you and me, who are legally prohibited from owning MBS with their long 30-year final maturities.

Had Bear gone bankrupt, these funds would have been compelled to seize and immediately liquidate the collateral into an already highly distressed market, ensuring that its investors (you and me again) would have likely lost much of their stake. Painful? Surely. Eye-opening? Definitely.

Instead of losses spreading through the system, however, the government stepped in. As J.P. Morgan CEO James Dimon said in the hearings, "This would have been far more, in my opinion, expensive to taxpayers had Bear Stearns gone bankrupt and added to the financial crisis we have today. It wouldn't have even been close."

This is clearly true on this deal and in the short run. But as Mr. Bunning implied, isn't it the regulators' job to ensure that we don't end up here ever again? That is the dilemma of "moral hazard." Consequences not suffered from bad decisions lead to lessons not learned, which leads to bigger failings down the road.

And so we have the insidious modern trend to shirk responsibility and blame others for our missteps. This trend, this "victim mentality," is a path toward personal disaster.

Perhaps if the Fed had raised short-term rates more aggressively, the excesses of the bubble could have been avoided. Maybe regulators could have noticed that the criteria for achieving an AAA rating had weakened markedly and inserted themselves early on. Yes, we can hope that the government takes the appropriate steps to ensure that the regulatory system improves as a result of this crisis. However, we citizens also need to accept our share of the responsibility.

Homeowners must learn that there are risks to using a home as an ATM. Investors who borrowed to flip condos must learn the downside of such risk. Individuals who steered money from insured bank deposits into uninsured money market accounts to pick up 1% more yield  like the institutional investors who purchased complex securities with little due diligence  need to know that in an efficient market, extra yield means extra risk. Those who played the derivatives market, focusing more on computer-driven pricing models and less on managing counterparty risk, must pay for that oversight. And, much as it is impolitic to say, people who took money from lenders and signed without considering how they'd repay those loans must also be held accountable.

In one of this year's primary debates, Ron Paul said it is not the president's job to run the economy. I'd add that it is not the government's job either. It is each and every citizen's job to manage our own affairs, make our own decisions, bear the fruits or painful consequences and learn our lessons.

The free market is the essence of our society's strength and is rooted in the Lincolnian precepts of accountability and responsibility. When decisions are made and actions taken (or not taken), there are consequences. These consequences are models for us to learn from and serve to stimulate social growth and advancement.

Mr. Penner helped pioneer the application of securitization technology to real-estate finance as CEO of Nomura Capital.

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If you owe the bank a million or so ...

... you got a problem!

If you owe the bank 100 million (or, maybe, a billion) ...

... they got a problem!!

And when all of the banks owe big buckets of debt ...

... when they run to the government for a bail-out ...

... the government's got a problem (so they figure)!!!

Can anyone (with a certain measure of memory) say, "Savings and Loan"??

When the profits are running - they're private.

When there's blood about to hit the financial streets - then the big financial guys seek a government bailout.

But it'd be terrribly gauche to call that ... "wellfare"!!

That's for the little guys who would rather collect it than work.

Smells about the same, to me.

But they have to find a scapegoat ... so Bear Stearns gets a tin can tied to their tail ...

... and J P Morgan (that earlier ate Chase) ...

... gets a good deal.

ole joyful

    Bookmark   April 12, 2008 at 1:32PM
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"But they have to find a scapegoat ... so Bear Stearns gets a tin can tied to their tail ..."

ole joyful, you sure have a way with

Instead of being rewarded for crippling the economy, wouldn't it be fun to see what some of these overpaid, underperforming CEO's of these banks would look like with a tin can tied to their tails?!

    Bookmark   April 14, 2008 at 1:59PM
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