Moral Hazards: Rewarding the Stinkers!
People are constantly asking me how we got into this economic mess, which is a byproduct of so many folks in foreclosure. My answer is simple… but direct … how did we get into Iraq? The answer is who cares? How do we now get out?
But there is a striking difference between these two fiascos: The economy and Iraq is that with the latter we are actually rewarding bad behavior– otherwise known as moral hazards.
The term “Moral Hazard”s is derived from the casualty (fancy term for fire) insurance industry. It seems that whenever the economy is bad and property values dip there is a “strange” phenomenon… more buildings burn down that have an insurance policy that is greater than the value of the property!
So where is the moral hazard in terms of the economy? Its all over the place… it is the Bail out itself!!! Let me briefly explain. Our largest banks and investment banks took on such huge amounts of risk and encouraged such reckless lending practices that they kept telling the small guy….’DON“T WORRY WE ARE TOO BIG TO FAIL!” In other words if we screw up the government (code word for you and me) will have to come to the rescue of these banks! And we are! Each family has already lent in future savings and earnings from our children and grandchildren probably about $20,0000 to these banks!
BUT how are these banks and more importantly the individuals who ran these banks being punished? Oh… pay them exit bonuses of a few billion dollars… while my clients, builders, developers and individual families get foreclosed and have to face financial ruin. Some will say… well your clients didn’t have to borrow the money in the first place? And my response is as follows:
Between a large multibillion dollar institution and a small borrower who has more information about the market? Who as a multi-national enterprise knew how these loans were being packaged, stripped and sold to unsuspecting investors around the globe? Who had a better idea that if this all came crashing down… it would be the small guy who would take the fall?
Bankers have a unique responsibility to their borrower… because they are in a superior position in terms of such enterprise knowledge, They may well have a legal duty as a fiduciary (look it up–lol) not to put their client knowingly or negligently tied down and blind folded in front of an oncoming freight train.
So… do I feel bad keeping my clients in their homes while I defend them against their morally deficient banks who are trying to kick them out of their homes? You answer that!