By Michael Lewis
April 16 (Bloomberg) -- The story line of the newest American financial debacle is now clear:
President Bill Clinton eased lending standards to encourage the rich people who run the mortgage market to embrace poor people with low credit ratings. Then these horrible rich people -- these unfeeling sharks -- went to work exploiting the poor.
First, they talked poor people into borrowing money they should never have borrowed. Then they brought in some other sharks to package the loans as bonds, who in turn talked some other only slightly less poor people into buying the bonds. The rich middlemen took their fees and left the poor borrowers and slightly less poor lenders holding the bag.
The moral of the story is also clear: No matter how much the government might try to help the poor, the rich people who run financial markets will find a way to screw them.
At any rate, that's how it reads to me in the many scandal- tinged accounts of the subprime loan-market collapse. And on its surface the moral is appealing: the story is always better, and easier to write, when the rich guys are the crooks. But this interpretation of current events does raise a few questions. To wit:
1) If the subprime home-loan market was a cynical conspiracy, why did so many of the putative conspirators wind up taking so much of the risk?
The single biggest collapse in the market has been that of New Century Financial Corp., the second-biggest subprime mortgage lender. When New Century collapsed it owed money to many, but the single biggest creditor, according to the London Times, was...Goldman Sachs Group Inc., followed by Morgan Stanley, Lehman Brothers Holdings Inc., etc., etc.
Out $1 Billion
Interestingly, New Century's 10th-largest creditor -- again, according to the Times -- was another subprime lender, Countrywide Financial Corp. (Barclays Plc, out $1 billion, was a mere 15th on the list, which gives you an idea of the sums involved.) Given this, you just know that it's a matter of time before we learn of some hedge fund that's on the verge of collapse as a result of its investments in subprime mortgages.
2) Why does the most financially obsessed and presumably well-informed character on earth, the American Investor, insist on playing the fool?
Amazingly, in the wake of the Internet boom and bust, some meaningful number of American investors fails to ask why they are being offered fantastic returns on their investments. Paid six times the risk-free rate on the notes and bonds of a subprime lender called American Business Financial Services (a name that's a sign of bad things to come, if ever there was one), they don't wonder why it is that their investments yield such spectacular returns. Instead, they become outraged when American Business Financial Services collapses, then sue the Wall Street investment banks who sold them the bonds.
Tell Your Story
Then they go to the media. From Bloomberg News we learn the sad story of a small investor named Buck Meyer who lost $300,000 when American Business Financial Services tanks. The man has two children! He planned to use the amazingly high interest rates he earned on his American Business Financial Services bonds to pay the mortgage on his own new house in Chattanooga, Tennessee! How could they possibly fail to pay off?
No one suggests that Buck Meyer, in effect, gambled his savings away -- that he might as well have grabbed the special offer of a free hotel room and flown to Las Vegas, groped his way to the roulette table, plopped his life savings down on 00, and then sued the casino for losing his money. Then again, the Vegas gambler can't expect journalists and juries to take his case seriously.
Cheap Insurance
Which raises yet another question: Did the knowledge that he could count on journalists and juries for sympathy embolden Buck Meyer to gamble his savings away? Even if Buck Meyer didn't consciously think ``If they don't give me my money back, I'll just sue 'em,'' was he not subconsciously aware that these lucrative if risky bonds came with a loose social insurance policy? Are the journalists and juries, therefore, partly to blame for his losses?
3) Why in this new drama is it so easy to imagine borrowers in a different role, other than the one in which they are currently cast: The Victim?
Moving is never pleasant or cheap, but that is the main cost to the subprime defaulter: He hands back the house, whose value has presumably plummeted, to the people who lent the money to buy it, and walks away. He rents. (Shrewdly!) In effect he bought a very cheap call option on the U.S. housing market. While he waited to see if his call option made him richer, he lived in a much nicer house than he could otherwise afford and probably wondered why rich people had become so recklessly open- handed. His behavior was irresponsible, but the markets let him do it and so it's hard to blame him for taking a flier.
Am I the only one who wonders how a person who borrows money he can't repay, buys a house he can't afford, and then stiffs his creditors, is allowed to play the victim?
A more convincing victim, I would have thought, is the person with weak credit but strong resolve who stood to benefit from a subprime loan -- and who now can't get one because the market is scared of his shadow.
(Michael Lewis, the author, most recently, of ``The Blind Side,'' is a columnist for Bloomberg News. The views he expresses are his own.)
To contact the writer of this column: Michael Lewis in Berkeley, California, at mlewis1@bloomberg.net
Last Updated: April 16, 2007 00:22 EDThttp://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_lewis&sid=akbLYcPz6UNM
No comments:
Post a Comment