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DanKarmelSecondPaper 14 - 04 Jun 2010 - Main.DanKarmel
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< | Mark, I've made some changes but am still working on it. I'll change this message when the rewrite is done. I left your comments since I don't know if you've read my responses yet. | >
> | Mark, See if you can work with this version. I left your comments since I don't know if you've read my responses yet. | | | -- DanKarmel - 01 Jun 2010 | | | Hot Potato | |
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< | The critical element uniting all the players, whether they believed that real estate was never going to die, or whether they were prepared to make billions pushing it over, was that no one bore the risks for their bad investments. Mortgage lenders originated the loans and would generally sell them in huge pools to investors within weeks, sometimes days. The loans were then passed along and cut up through various entities, all the way up to the government-sponsored Fannie Mae and Freddie Mac. At both the front and the back, the ones usually left holding the bag were the original borrowers and the government-sponsored corporations. Even the major credit rating agencies, like Moody’s and Standard and Poor’s, the entities most in need of a proper perspective on risk, were paid by the banks issuing the securities they were rating, and thus similarly created risks for which they were in no way accountable. It would be as if “Hollywood studios paid movie critics to review their would-be blockbusters." So to answer the question of why some of the best minds in finance didn't figure out that they were building a house of cards - they had no incentive to. | >
> | The critical element uniting all the players, whether they believed that real estate was never going to die, or whether they were prepared to make billions pushing it over, was that no one bore the risks for their bad investments. Mortgage lenders originated the loans and would generally sell them in huge pools to investors within weeks, sometimes days. The loans were then passed along and cut up through various entities, all the way up to the government-sponsored Fannie Mae and Freddie Mac. At both the front and the back, the ones usually left holding the bag were the original borrowers and the government-sponsored corporations. Even the major credit rating agencies, like Moody’s and Standard and Poor’s, the entities most in need of a proper perspective on risk, were paid by the banks issuing the securities they were rating, and similarly created risks for which they were in no way accountable. It would be as if “Hollywood studios paid movie critics to review their would-be blockbusters." So to answer the question of why some of the best minds in finance didn't figure out that they were building a house of cards - they had no incentive to. | | | After The Sale | |
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< | Why aren't individual borrowers allowed to play the game too? Instead, they are the ones being called upon to make good on moral obligations somehow being read into the contracts. The altercasting mechansim identified by Leff in Swindling & Selling may help explain the way that borrowers act after the sale, especially when their mortgages are underwater. | >
> | Why aren't individual borrowers allowed to play the game too? Instead, they are the ones being called upon to make good on moral obligations somehow being read into the contracts. The altercasting mechanism identified by Leff in Swindling & Selling may help explain the way that borrowers act after the sale, especially when their mortgages are underwater. | | | For one, we call the borrower a “homeowner.” Of course, there’s a difference between that and owning your home free and clear. Yet the mortgage industry wants you to be a homeowner right away, regardless of what sticks you get in that bundle - because why would a homeowner walk away from the home he owns? Additionally, the deal itself is being burdened with all sorts of extraneous notions. Leff notes that we are a society that is skeptical of gifts - "You don't get something for nothing." For borrowers whose homes are underwater, the problem is not that they were mistakenly convinced they were giving something in return, but rather that they are mistaken about what exactly that something was. |
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