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December 21, 2007

No More False Dichotomies: Did she jump or was she pushed?

Tip O’Neill famously said (or so the story goes) all politics is local. To which I would add that most people — those who are nominally observant, at least — typically know and understand what is happening around them long before the politicians and pundits. By the time an issue hits Congress and the news cycle, it’s often too far gone to do anything but sit back and watch the blood flow.Case in point: the subprime mortgage issue. It’s referred to variably as a crisis, meltdown, calamity, fill-in-the-blank-with-your-disastrous-noun-of-choice. Unlike some issues that dominate the news, no one’s calling this one exaggerated. It is real and it is deep, and we don’t know where it’s going to end. You might reasonably expect, though, that average folks will feel residual pain through no fault of their own.So here’s a question. How would you like to run a business where, say, you sell eggs? You go into your chicken coops in the morning and pick up all of the eggs you can find, with absolutely no regard to whether they’re good eggs. You put them all in baskets, and around lunchtime, a guy comes to pick up your eggs. He pays you handsomely in cash each time, then sells the eggs to local restaurants.Your chickens have been so productive that the restaurants don’t notice they’re tossing out about half on any given day. But eventually, your chicks produce only bad eggs, and the restaurant owners begin calling you to complain. But you refer them to the middle man, who always told you quality control didn’t matter because there were so many eggs to go around.That is essentially what happened in the subprime situation. Mortgages were viewed as a suitable investment vehicle for investors looking for places to put money after the tech bubble burst. With so much capital needing a place to land, banks and other institutions began loaning money to anyone with a pulse. Wall Street firms saw a new high-yield investment and started buying bundles of subprime mortgages with little regard to whether the individual loans therein were solid.The banks didn’t care; they kept making the loans (eggs) and selling them for a nice price until the people downstream started squawking. As your mom might’ve said, it’s all fun and games until someone gets an eye shot out.The way you view this situation probably speaks to your general view of the world. Some point out increased home-ownership is fabulous — home-ownership reached a record high 69 percent at the height of subprime hysteria — but others point out the statistics were never real.Some attribute the crisis to honest mistakes based on miscalculations, while others point out the situation was highly exploitive and that everyone profiting from it had to realize it was phony — but did not care. Some people see fraud.Gretchen Morgenson, a former stockbroker who now covers the financial world for The New York Times, said this in a June interview with Bill Moyers: “It feeds into this idea that we need to make more loans. The lender in the old days kept the loan on the balance sheet, had an interest in seeing it was repaid. Now this lender sells it to someone else. Not his problem anymore. Gets the money back to make another loan. The lenders are now more interested in earning the fees associated with the mortgage, which are extremely lucrative. And they have no credit risk because they have pawned off the loan on somebody else.”If that isn’t a classic conflict of interest, I’m Tip O’Neill.I’ve heard this crisis compared to a swimming pool — that some borrowers got in the deep end without realizing the water was over their heads. Frankly, though, we know some people are too unsophisticated to resist deals they know are too good to be true. Those people, I’m afraid, were pushed into the deep end with malice aforethought.This crisis did not come from left field. People “on the ground” saw it brewing years ago; we have fail-safes that failed. There are logical reasons why grown men and women buy into feel-good illusions — and most relate to greed. Mom also said not to believe in things that seem too good to be true — but we didn’t listen.Now we’ll wait and see where this one ends up. But, please, Santa, let’s not bail out Wall Street. They’re big boys and girls down there, and they should know better. If they don’t get a lump of coal, what are the chances something similar won’t happen again?You can take that to the bank. Contact the writer at cstemle@leoweekly.com