Too Big To Fail

Too Big To Fail

This is a re-post of a great blurb by Boris Bozic, President of MERIX, a broker only lender. He is a pretty smart gent and his light and direct points are worth the 3 minutes it takes to read this.

28 Jun

This was a term we were all too familiar with back in August and September of 2008. It is also the name of a new HBO movie which chronicles what transpired at the beginning of the sub-prime mortgage meltdown. HBO assembled an outstanding cast, and given the subject matter the movie was rather entertaining. I would highly recommend watching the movie. It is a good reminder to all of us that the term boom and bust is as applicable today as it always has been.

In typical Hollywood fashion, a liberal bias amounting to revisionist history, the movie tried to blame George W. Bush and Ronald Reagan for the meltdown, and all other evil things. The truth is you can go back to the Jimmy Carter administration, and the passing of the Community and Reinvestment Act. That work of art stated that home ownership was a right, and not a privilege. This is where the slippery slope began. Then old Slick Willie, aka “which way are the political winds blowing today because that’s what I’ll stand for”, Bill Clinton, put that program on steroids. Suffice to say the responsibility for the meltdown, and the nuclear fueling of the problem, is equal parts Republican and Democratic.

The movie is a great reminder of how perilously close we came to an economic meltdown. How our standard of living was at the precipice. If you think this is hyperbole, because this was really a US issue, the reality is that this carcinogen (sub-prime mortgages) infected world markets. I can’t help but to think about the auto worker in Windsor and Detroit, the welder in Germany, the machinist in France, all, asking the same question: “Tell me again why my pension has taken a hit because of some mortgage problem?” No one from Wall Street could explain what happened in laymen terms. The average person cares little about default swaps, derivatives and mortgage-backed securities. All the layman cares about is finding out who the hell let this happen. That question has still gone unanswered.

The movie doesn’t deal with the who. The movie played up of the part about the moral dilemma the government faced. Who did the government decide to bail out, AIG, and who did they allow to fail, Bear Stearns and Lehman Brothers. All very fascinating and dramatic. But after watching the movie I couldn’t help but ask myself the following question: “How the hell has no one gone to prison over this?” I’m all for a free market system, and the pursuit of wealth, but reckless endangerment of our economy and standard of living should not go unpunished. There were individuals and institutions who knew full well they were passing on toxic assets. They were passing on the risk so they didn’t care. They could care less about the consequences. Yet none of the perpetrators of this ingenious fraud has ever been charged or convicted. You would think at least a couple of them should be experiencing the joys of being passed around in prison for a carton of smokes.