- Top Features:
- War Room
- Glenn Greenwald
- Broadsheet
- Joan Walsh
- Camille Paglia
- Since You Asked
- Follow Salon:
Read other letters about this article
I did not finish my last post so . . .
I keep hearing discussion of moral hazard in insurance terms relating to the financial markets, but no-one mentions the biggest moral hazard, that bankers and executives are being paid to do deals -- period, regardless of overall quality. So if they sell a lot of overpriced debt, mis-rated, or push an M&A that is a loser for the companies involved, or a buyout that simply asset strips and then IPOs a company with long term problems they "make out like bandits." There is a moral hazard, doing lousy deals gets you paid, maybe more than if you did a good deal, and certainly its easier than finding a good deal to sell.
The moral hazard problem is compounded by structural changes in the investment banking and finance industry, in particular the end of partnership as a business model. Until about two decades ago the vast majority of financial firms were partnerships -- even Goldman Sachs. The bankers (or at least their bosses) were risking their own money, and indeed a deal in which the bank of finance house arranging it had little or none of its own partners funds at stake was regarded with suspicion. Today, the banks are at most risking shareholders funds, and often not even that. Even the big traded banks were institutions where bankers spent decades rising up the ladder, where as today they spend 1-4 years -- this means that when the "shit hit the fan" on a toxic deal, they were their to get canned; now the bankers have collected their bonuses and largely moved on.
To get an idea of how this has effected mortgages, recently I was talking to an old friend, a property lawyer. He is dealing with sub-prime litigation, where the big funds are suing the smaller aggregating funds for selling them suspect mortgages, or trying to cancel the mortgage. One cluster of mortgages he finds very interesting -- mortgages ostensibly written for owner occupiers, but in reality on rental properties -- million dollar beach houses, apartments, etc. The lenders are now arguing that they were 'had' because the property was a rental. The funny thing is the owner occupier covenants, which the lender wrote -- they say "Buyer will live in the property." This is very loose language -- "buyer will live" leaves open when, for how long, for what proportion of the time, etc. In essence, you could just intend live in the property for a few weeks at some point in the future and fulfill this, and thanks to the legal principle of contra proferentem, ambiguous terms are construed against the drafter, the borrower may be OK. However, this is an odd clause -- owner occupier clauses for decades have been more precise -- so why were the banks drafting such sloppy clauses; could it be that they wanted to make the loan to a landlord, but wanted to be able to sell it on as a prime-owner-occupier loan. Sure looks that way.
