Tuesday, August 12, 2008

The Dream World of Mortgages

I dreamt the other night of being at a casino. I sat at a $5 per hand blackjack table and began playing. As the dealer flipped the cards across the felt strange events started to happen. Each time I lost a hand the other casino patrons would take up a collection to cover my loss. Then someone would rush over to add more chips to my stack. But each time I won I got to keep the money. I simply put the chips I won in my pocket. Wow, I thought; I should try this at a more expensive table.

I moved to a $10 per hand table and the same thing happened. Next I tried $50 per hand and then $100. No matter how large a bet I placed or how long a particular losing streak lasted, the lost chips would magically reappear. But, any win was mine to keep and no one seemed to care. An attractive waitress came to offer a drink. I asked for some Grand Marnier and tipped her with a $100 chip. She rushed back with the drink, a seductive smile and a food menu. I kicked back and doubled-down on a hand blackjack players call a hard-16. (Yes, I know that is a stupid play, but I might win and it doesn’t cost me when I lose.) I think I’ll just stay here. No need to go back home and return to that activity called work.

Then I awoke and regained my senses. Real life isn’t like that; or so I thought. I made some coffee and as I sipped and savored the aroma my eyes focused on the morning newspaper. I read about the government bailing out near bankrupt companies with names ending in Mae and Mac. Wait, I must still be dreaming. Is the caffeine working this morning?

Indymac, Freddie Mac and Fannie Mae were run as private companies with stockholders and highly compensated executives. The executives made a series of large questionable bets on real estate that for several years paid off handsomely. But now fortunes have changed and the bets are losing big time. Like many problem gamblers, these executives did not know how to control risk, stay within a budget, or quit before going completely broke. But it didn’t matter to them because while they got to keep their winnings for the bets that paid off, ordinary citizens are being forced to take up a collection to cover the bets that lost.

Government talk and action on the financial crisis caused by bad loans is completely disingenuous. Political leaders extol the virtues of free, unregulated, private enterprise motivated by profit seeking executives and corporations. But when these private businesses fail, our leaders tell us that taxpayers must step in to prevent the entire financial system from collapse. It turns out that the Maes and Macs performed a necessary public service, much like a utility. But Marylanders already know what happens when utilities are deregulated and run for profit. We pay extra on our electric bills every month for that improvement.

IndyMac grew rapidly during the real estate boom by specializing in so-called “Alt-A” loans. These loans did not require homebuyers to actually document the income or assets they claimed. After its failure the FBI launched an investigation of the company for possible fraud. I’m just shocked, shocked to think that without documentation, bank officials might have just made up the numbers on loan documents.

Private enterprise works well with private money. But, in the mortgage business we have a system that allows private gain to accrue from risking unlimited amounts of taxpayer money. The result is that since March authorities have indicted more than 400 people who worked in the real estate industry. We the taxpayers are now footing the bill for massive amounts of collusion and outright fraud.

In Maryland, I know of no legal blackjack games. Neither the state nor federal governments trusts its citizens to play the game responsibly. But, while casino blackjack is stacked against the player, at least it’s regulated in states where it is allowed. Many tax-paying citizens were financially ruined in the poorly regulated real estate market. But, the government says that they should have made more responsible choices. Do they think this is a dream world?

Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy

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