As anticipated, here comes the Bush Administration with a plan to make the subprime situation worse.
It’s called the ‘teaser freezer’ program and it could be announced as early as today. What’s the idea? Well, it’s quite simple – just pass a law! Actually, we’re exaggerating. The discussion so far, as we understand it, is to ask for voluntary cooperation from the mortgage lenders. They are supposed to let the teaser rates ride… for people who can’t afford an increase.
“Deal in the Works to Freeze Rates on Subprime Loans,” says the Washington Post. Of course, if such a ‘teaser freezer’ deal made sense, lenders and borrowers could work it out on their own. And if it were possible to eliminate the problem – or even ease it – by government decree, it would be a very different world than the one we live in. When people owe money and can’t pay it back, someone is going to take a loss. You can diddle with the details all you want… all you’re going to do is to shift the loss from someone who deserves it onto someone else.
The great innovation of the recent credit boom was to create a stick that was long in the middle and short on both ends. On one end, the borrowers are now losing their houses. On the other, the investors are losing their money. The financial intermediaries – notably Goldman Sachs – are sitting pretty. They made their money by putting the two dumbbells together. And now, the Bush Administration is taking the time-honored tradition of pushing more of the losses away from the borrowers…and towards the other end of the stick, that is, towards the lenders. Why? Hey…where have you been? We live in a democracy. One man, one vote. How many subprime borrowers are there? How many subprime investors are there? You do the math. And expect more meddling as the crisis continues and the ‘teaser freezer’ plan unfolds.
Among the many investors in subprime debt were state and local governments. Now, the press reports that Florida schools are “flat broke” as a consequence. And they’re not the only ones. We’re read about a couple French banks that have taken huge hits. And in last week’s news was a report from north of the Arctic Circle, where towns in Norway had – you guessed it – invested in subprime debt. Citibank (NYSE: C) sold them the toxic stuff. Now, the poor Norwegians are not going to be able to retire in the style to which they had hoped to become accustomed.
So you see how it works? What goes around comes around. A fellow buys a home he can’t afford. Wall Street sells the debt to a pension fund. The guy defaults on his mortgage. He loses his house… and his pension! The Wall Street financier, in the meantime, puts a new wing on his palace in Greenwich.
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