Thursday, February 14, 2008

Banks Beg For Congress To Establish a Moral Hazard

From the WSJ:

The banking industry, struggling to contain the fallout from the mortgage debacle, is urgently shopping proposals to Congress and the Bush administration that could shift some of the risk for troubled loans to the federal government.

One proposal, advanced by officials at Credit Suisse Group, would expand the scope of loans guaranteed by the Federal Housing Administration. The proposal would let the FHA guarantee mortgage refinancings by some delinquent borrowers.

Credit Suisse officials have met with senior officials from the Department of Housing and Urban Development, which runs the FHA, and other policy makers to discuss the proposal.

The risk: If delinquent borrowers default on their refinanced loans, the federal government would have to absorb the loss.

This news infuriates me to no end. What makes it worse is because this is an election year, the plan might actually gain traction.

Let's review all of the actors that caused this mess.

Mortgage brokers: Because the person brokering the loan knew the loan would be sold to a third party the broker has no obligation to make sure the borrower would actually repay the loan over an extended period of time. In addition, some brokers were given higher commissions for selling riskier loans.

Investment Banks: These organizations were hungry for collateral and pressured brokers and originators for more loans to pool and sell. This is the type of pressure that led the mortgage bankers to stop looking at things like "credit history." In addition, investment banks were lax in their due diligence to deeply inspect collateral.

Ratings agencies: who actually said most of this paper was AAA and therefore could be purchased by practically anybody.

All these people are now suffering. Many businesses have gone out of business or are suffering serious declines in their share price. GOOD. Let me repeat that. Good. Yes, I know that sucks for the rest of the economy. But the only way for these organizations to change their behavior (which was the proximate cause in starting the mess in the first place) is to feel the pain. And publicly traded companies feel pain by reporting losses to their shareholders.

Bernanke has already demonstrated that he is Wall Street's bitch. Let's hope Congress can grow a spine and tell the financial industry to grow up. Of course, this is the same organization that is now investigating steroids at the beginning of a recession, so who am I kidding.