What Happened to Right and Wrong?

As many Americans have been, I’ve been following the current housing credit/financial meltdown, and, as someone who was once a practicing economist, I have more of a professional interest than many. But in reading all the business and financial journals I receive, I’ve noticed something startling: almost no one talks about the moral dimensions of the mess. It’s as though the “business model” has subsumed all sense of ethics and morality.

Now… let’s put this in a simplified perspective. Builders were building too many houses for those who could qualify for housing under the “more traditional” standards. So more “innovative” ways of mortgage financing were developed, many of which required no money down and minimal, if any, detailed credit checking. In turn, these marginal and sub-prime loans were bundled into larger mortgage tranches, if you will, which were then securitized and sold to various institutions. In many cases, the “leverage” was close to 65 to 1. In plain English, that meant for every $65 loaned, only one dollar of reserves, or cash on hand backing the loan, was available. Now, leverage works both ways, and when the housing market slowed, and when home-owners began to default on loans, each dollar of default theoretically required the institution holding the securities to come up with an additional $65. That meant that less than a five percent default rate could wipe out the value of the other 95% of the mortgage package. Most financial institutions could not come up with anywhere close to the additional reserves required… and… the rest, as they say, is history, if aided, by another illegal but tolerated practice of the brokerage business — naked short-selling, which the SEC just belatedly announced would no longer be accepted.

Where does morality come in? At all levels.

First, it’s been estimated that something like 30% of the subprime loans were written with terms that effectively made refinancing impossible if the price of the house did not increase dramatically. Not only was this financially unwise, but locking a gullible buyer into such a situation is unethical, to say the least. Then, the higher level junior executives who sold these mortgages to the institutions that securitized them dramatically understated the risks, also not exactly the most ethical of behaviors. The institutions that bought the securitized loans didn’t exactly perform the greatest due diligence, and there are stories, if currently unverified, that some analysts who tried to raise the question were quashed… because, after all, this quarter’s yield is far more important than what will happen a year or two from now. The CEOs of the institutions involved certainly didn’t look beyond the immediate balance sheet, and they were paid and took enormous salaries and other compensation while insisting that their firms were solvent and would remain so, which is a form of either naivete [and one shouldn’t be a CEO with that level of naivete] or misrepresentation, which is a form of fraud. And it doesn’t appear that all the brokers who decided to profit from the market decline by short-selling the stock of companies like AIG, Lehman, and Merrill Lynch, without having the stock to cover the short-sales, were even behaving legally, let alone ethically. Now, because of the intertwined nature of the world financial markets, in some form or another, U.S. and other taxpayers will have to come up with the cash reserves to keep the whole system from crashing, and that cash requirement is nothing more than an enormous theft from the public — an elaborate variation on the Ponzi or pyramid schemes of the past, which have resulted, if only in the past, with their perpetrators going to prison. Here, the executives at all levels of these public companies raked in enormous salaries and bonuses as a result of these unethical and sometimes even illegal practices, and I sincerely doubt that any of them will face criminal charges.

Didn’t anyone of importance say, “These kinds of mortgages are wrong.”? “These appraisals are inflated.”? Didn’t any executive observe that the leverage requirements were so far out of line with banking and securities reserve requirements that they were in effect dangerous and fraudulent? Didn’t any brokerage firm or executive crack down on naked short-selling?

So far as I can tell, none, or very few, did. Instead, they followed the “business model” of “the highest level of short-term profit possible by any means allowable under the law.”

The problem that no one seems willing to face here is that brilliant men can always find a way around the law. Always! Our saving grace as a society in the past has been that there has been a preponderance of men and women who also asked, “Is it honest? Is it right?… instead of asking, “Is it legal and how much can we make?”

And it’s also sad that, so far, very few, if any, of our vaunted media, self-anointed guardians of liberty and discoverers of wrong-doing, have asked the questions posed here.

All the new rules and regulations will mean nothing until we, as a society, stop insisting on “more” at any cost and start asking, “Is it right?”