Later this week my real estate law class turns to the topic of real estate finance, from which it is a brief stroll–maybe even a short stumble–to sub-prime mortgages, collapse of the housing market, the worldwide recession, Wall Street malfeasance, borrower irresponsibility, mortgage broker greed, and all the other stuff that dominated the news a few years ago, but now is fading into the mists. (Charles Ferguson’s remarks during his Academy Award acceptance speech for Inside Job show he hasn’t forgotten.) A blessing of living in the information age is–duh–that there is lots of information. A lot of crap, but a lot of gold–books like The Big Short by Michael Lewis, House of Cards by William D. Cohan, Too Big to Fail by Andrew Ross Sorkin, articles (all from Vanity Fair) like Michael Lewis’s Wall Street on the Tundra, The Man Who Crashed the World, and Beware of Greeks Bearing Bonds (the subject doesn’t matter–Lewis is always worth reading), and podcasts. Two, from This American Life, present clear and interesting overviews of sub-prime mortgage generation and securitization and their relationship to the capital markets: The Giant Pool of Money, originally aired 9 May 09, and Return to the Giant Pool of Money, originally aired 25 Sep 09.
And videos. A student recommended this terrific 11-minute animated explanation of the origins of the credit crisis. As the accompanying notes acknowledge it leaves out a few things, but that’s a quibble. It’s remarkably clear and concise.
It may nothing more than that I’m a lawyer who believes Words Matter, but calling the bill pending before Congress to purchase mortgage-backed assets a bailout provides more heat than light. Other than investment bankers and others clutching on to their jobs before they sink beneath the foam few people want to bail out Wall Street as an end in itself, which is what the term suggests the bill is for. Many of those railing against its passage–40 opposed for every 1 in favor in this poll, 100 to 1 against in that Congressman’s constituent messages–think “Wall Street got us into this mess, so why should we taxpayers bail them out?”
Here’s why: if this (take your pick) credit market relief/toxic asset superfund bill doesn’t pass then the credit conflagration will be apocaplyptic. There will be no credit to buy new factory equipment or purchase inventory, no money to refinance mortgages, no credit at all. Wachovia Bank is the latest victim, acquired by Citigroup today for ten cents on every dollar of Friday’s closing price. Removing these toxic assets from balance sheets puts more money into the system and should ease fears of further bank collapses and help open credit flows. It won’t solve our economic problems, but if it does not pass soon our economic problems will be far worse.
In a prior life I did workouts of non-performing loans. One lesson I learned early is don’t take the borrower’s default personally. Sometimes the borrowers were fraudsters and some of them went to jail, but I learned not to treat defaults as teachable moments for the borrower’s moral edification. Our fund’s financial interest was in cutting our losses, getting our money out, and putting it to work again as soon as possible. Sometimes that meant holding my nose and letting a defaulted borrower leave the table with some money in his pocket. Distasteful, but if it meant we got our money back today instead of after months of legal fees and delay, it was the best decision financially. I didn’t believe I served my client’s interest through punishment, and my client didn’t think so either. This financial relief bill involves much more complicated issues but it is still a workout. A massive, critical, desperately essential workout.
I understand why Main Street wants to punish Wall Street (a binary distinction that obscures more about the nature of our financial problems than it reveals) but this week is not the time for head-hunting. In Friday’s debate both Obama and McCain missed opportunities to educate and persuade why federal relief is essential. Passing this bill is probably not enough to calm the markets, but it’s the first step.