Don't blame the banks — it's Mort's fault

As the drama continues in the subprime mortgage lending crisis, it's a fair question to ask: Just who is to blame for this mess?
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(U.S. Congress Joint Economic Committee)

As the drama continues in the subprime mortgage lending crisis, it's a fair question to ask: Just who is to blame for this mess?

Q. Who caused the credit crisis? A. Mort Myerson of Port St. Lucie, Florida. Q. What did he do? A. Eighteen months ago, Mort bought a condo for $1,250,000. He got a subprime mortgage for the full purchase price. Q. And that caused the credit crisis? A. Yes. Discrete slices of Mort's mortgage were sold to 4,163 separate banks and financial institutions. Because Mort claimed he was trustworthy, the banks borrowed 1,000,000 to 1 against Mort's payment stream and used the proceeds to construct complicated put/call collars on Mort's mortgage by selling synthetic options to each other. Then they placed these assets in 1,236,894 different Collateralized Mort Obligations (CMOs) that they sold to other financial institutions. Of course, they added to their positions by both buying and shorting Mort Credit Default Swaps. Because no one imagined Port St. Lucie real estate prices decreasing, banks committed over three hundred billion dollars to Mort Obligations. Q. And then? A. Two months ago, Mort discovered his condo was now worth only $975,000 and defaulted on his mortgage. All hell broke loose because financial institutions had no idea of how many hundreds of millions they had lost on Mort Obligations. Credit markets froze. Q. What do we do now? A. Bail out the banks. The Fed is already doing this by lowering interest rates, allowing banks to use worthless Mort Obligations as collateral for low-cost loans. Q. Why must we bail out the banks? A. To maintain orderly financial markets in the midst of a credit crisis. Q. But didn't the banks help cause this crisis? A. No. It is all Mort's fault. All the banks did was to help a poor guy buy the condo of his dreams. Q. But don't the banks have some responsibility for levering, slicing, dicing, derivatizing, re-levering, securitizing, shorting, and optioning Collateral Mort Obligations? A. No. This is precisely the type of forward-thinking financial innovation we need to spur the growth of our service-based economy. We can't penalize entrepreneurial initiative at a time when the Fed needs to restore confidence in the financial markets. Q. Why can't investment bankers take care of themselves? Aren't they geniuses? A. They are geniuses when markets are rising. Q. Please explain. A. Financial genius is leverage in a rising market. Financial ruin is leverage in a falling market. We should applaud, and richly reward, the former as a triumph of free enterprise, but must offer government protection if faced with the latter. Q: Why does the government always get stuck with the tab after the bubble bursts? Why doesn't the government intervene before the bubble bursts? S: We don't want government interfering with free markets. As Allen Greenspan often counseled, government cannot tell when a bubble is forming. Q: Then how can government tell when a credit crisis is threatening? A: Easy. Investment bankers demand a government bailout. Q: Why don't the investment bankers tell government when a bubble is forming? A: Why would they do that? They make money by the bucketful before the bubble pops. Q. After we rescue the bankers, will anything change? A. Democratic pinkos will call for more regulation. Q. Do we need more regulation? A. Absolutely not. Government regulation stifles individual initiative, innovation, and risk taking. We have the right amount of regulation today. When times are good, we allow untrammeled greed and unregulated free markets to generate eye-popping bonuses. When this leads to excesses and crashes, the government steps in and bails out the big boys. Why change a system that is perfectly in balance? Q. Why doesn't the government simply pick up Mort's mortgage payments? Everything would be back to normal and it would cost only $1,250,000 compared with a $400 billion bank bailout. A. Are you serious? That would create a moral hazard. People like Mort must be held responsible for their actions. We can't use taxpayer money to reward his irresponsible behavior.


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