Rescue Me

The debacle that is now the U.S. credit market has roiled world financial markets and driven the US economy to near recession. Democrats demand that the government save “innocent homeowners” who availed themselves of credit offers that were far too good to be true. Republicans (at least some of them) suggest that we save the major Wall Street firms who were the originators of the financial instruments that lead to cheap loans. In reality, they’re both right and they’re both wrong. Everyone involved in this debacle made bad decisions, some very, very bad. Everyone succumbed to greed. And now, the tax dollars of those of us who have been responsible borrowers will be used to bail them all out. You’re welcome!

It began with Wall Street money managers who created financial instruments that were the legal equivalent of an elaborate Ponzi scheme. Companies like Bear Stearns provided hundreds of billions of dollars of sub-prime credit to large and small mortgage lenders at rates that were unreasonably low. As a consequence, lenders, exhibiting greed of their own, fought to make mortgage loans to people who were unqualified to receive credit. And the borrowers themselves are hardly innocent. Over-extending themselves on houses they could not afford using no-down payment balloon mortgages that would come back to haunt them, many of these “innocent consumers” planned to flip properties in a bull real estate market and walk away with big profits.

James Grant comments in the WaPo:

What makes these proceedings so frightening is that not only is credit in crisis but so, too, is money. There are well-founded doubts about the promises to pay money and about the nature and integrity of the dollar itself. So it was on Friday that the Federal Reserve committed to lend undisclosed billions to bail out Bear Stearns, a top Wall Street purveyor of mortgage-backed securities and a leading lender to hedge funds. Where will the Fed find these dollars? Where it always, ultimately, does. It will have to print them, despite abundant evidence from the currency and gold markets that the world has just about all the dollar bills it cares to hold.

By the looks of things, America's surfeited creditors must make room for many billions more. The markets are in "uncharted waters," Robert Rubin, chairman of the Citigroup Executive Committee, said in a speech Friday. He urged the government to exert itself on behalf of the mortgage market and the American homeowner.

And who are these bankers who went sailing off the end of the Earth and thereby find it necessary to pass the cup to the government? The company of errant, if lavishly compensated, navigators includes none other than Rubin himself. Last fall, the former Treasury secretary confessed to Fortune magazine that until the mortgage storms broke over his head in the summer of 2007, he was unfamiliar with the kinds of complex mortgage structures with which Citi's own balance sheet was packed. Almost certainly, the gulf between competence and compensation on Wall Street has never been wider.

“Competence and compensation”—a nice turn of a phrase. The geniuses on Wall Street reward themselves with multi-million dollar year-end bonuses and then scramble to have the Fed or Treasury bail them out when everything gets upside down. The geniuses on Main Street (who purchased $500,000 properties when they could afford only a $200,000 house) forgot that balloon mortgages do exactly what their name implies, and now look to Washington to save them from their own financial incompetence. It’s as maddening as it is predictable.

“Rescue me,” each cries, and responsible taxpayers, doing what we always seem to do, respond.

Update (3/17/08):

It looks like J.P. Morgan Chase & Co. is going to buy beleaguered Bear Stearns to keep it solvent. Reuters reports "Barring some unexpected boardroom generosity by JPMorgan Chase & Co, executives at Bear Stearns Cos may find that their walking away money has been crunched by the credit crisis."

No golden parachutes? How nice. Some small measure of justice.