The stupid and irresponsible "home owners" bail out is happaning
- Thread starter RedDuke
- Start date
Subprime Mess Produces Unqualified Victims: Michael Lewis
2007-04-16 00:22 (New York)
Commentary 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.)
2007-04-16 00:22 (New York)
Commentary 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.)
That's what I was thinking, frankly. I just didn't want to hurt his feelings.
Why weren't people complaining back in August when I was. That's cos nobody was short.
Outstanding post.
heh heh now not only will they pay PMI, but also MRI (mortgage reset insurance). LOL