The Perils of Insta-Commentary

In Friday's story for The Big Money I wrote about the likely winners of the crash: Bank of America's Ken Lewis and JP Morgan's James Dimon. Well, I do believe there will be winners in this--every disaster gives someone a chance to capitalize on it.

It's now two days later, and as of about an hour and a half ago ... there's no bailout. Ergo, as yet, no winners. Or not the winners I predicted, at any rate. I'm not ready to say I'm wrong--just premature. We'll have a bailout of some sort at some point soon. I think. But I should be more wary of calling the future, because even if there's a bailout, what happens after can be just as unpredictable as the lead up.

I speculated that the chiefs of Bank of America and JP Morgan seemed to be making a very safe bet picking up their competitors on the cheap and counting on a bailout to limit their losses. How much confidence do I have in that thought now? Less than last week, for sure. Things will get worse, not better, for the no income, no doc, no nothin' loans that were the stock in trade of companies like WaMu. Whoever is holding all those bad loans when the music stops can spend years stumbling along and paying off the damage. And whatever bailout we've got could be a lot less generous to banks than they'd like. Wait, didn't I just swear off the prediction business?

A Modest Proposal For An Unpleasant Job

So, the next SEC chairman will get to take over a financial system on the brink of collapse, sell a bailout that the public is convinced is a scam to raise their taxes, and navigate past the knives of the corporate chiefs who want governmet aid today but will whine about regulation tomorrow. No wonder John McCain is looking far afield for an SEC chairman (though the chance that he'll get to name him seems to be diminishing daily--let's assume he won't propose postponing the election).

If Andrew Cuomo isn't your kind of guy, Chumpchanger is happy to nominate a far stronger  out of the box choice: Eliot Spitzer. He's not soft on Wall Street, he's been around the block, he is a lot smarter on regulatory matters than personal ones. And most important, he's a guy without a lot of options, a key credential when you need to fill a job that nobody want.

Does Anybody Read The Fine Print?

Finally a chance today to put in print something I've had my eye on for months. In all these months of posturing about the evils of mortgage underwriters steamrolling the people who took their too good to be true offers into foreclosure, I don't think I've seen a journalist--surprisingly, not even the indefatigable Gretchen Morgenstern--parse the documents of an actual mortgage backed security deal.

In The Big Money today I culled one of the good bits from one Goldman deal. What I don't get into in the story--because, let's face it, there's only so much legalese that an ordinary reader can take--is that the limits that deal puts on giving any relief to homoeowners in trouble are far from the worst I've seen. I don't cite the language of some mortgage backed securities created by Countrywide in the story, but I'll add it here:

The master servicer may modify any mortgage loan provided that the master servicer purchases the mortgage loan from the trust fund immediately following the modification.

Translation: sure, the master servicer--that's Countrywide--can modify a loan that's about to go bad, if they feel like buying it back for it's face value. And there's no chance in hell they will do that.

Connoisseurs of fine legalese will appreciate the ass-backward construction here. But it's not so backwards that you can't figure it out if you try, and not many people seem to have tried. This despite a stream of articles about Countrywide's notable intransigence in helping their borrowers, stories about the noisy and essentially result-less pressures put on them by community activists, and editorials calling on them to change their ways. I will bet that even the fact that the prospectus laying out these terms is public record and available from the SEC's website for the price of a mouseclick will come as a surprise to many reporters. As borrowers were held by the hand by mortgage brokers telling them that the details didn't matter, so reporters too look at the eye glazing hundreds of pages of financial-ese and imagine there are no bombshells in there. There are.

Are Credit Cards Calling Off The Suicide Pact?

Among the most controversial--okay, let's use plain language and say sleazy--practices of credit card issuers in recent years is that of "universal default," a policy of raising rates on a holder of one card for being late on payments on another card or loan. The justification for this was that being late on any loan is a sign that a customer was a poor credit risk. This is true. It is also, unfortunately, made even more true when someone who is already floundering faces ever rising rates.

I recently got an unappealing offer from Bank of America, one of the credit card issuers with whom I have managed to keep a vertigo-inducingly high balance, suggesting that if I wanted to keep using the card I could do so at the modest interest rate of 22 percent. I said no thanks--the current rate of 8.74 seems a lot more attractive, and I'll just stop using it and keep paying it off at that rate. Most writers on money do not carry big credit card balances (and good for them!) and if they do they don't pay their bills late anyway. To this I am an exception; you can file that under "the shoemaker's children," or just give me a pass because I hardly ever feel like I'm in a position to give other people financial advice. My bad management of my own affairs does have the advantage that it gives me a view of credit card practices that few people who write on this subject have.

From my front row seat it's clear that not only are the card issuers shying away from universal default, but they are much, much less ready to raise rates for any reason than they were a couple of years ago. The letter from Bank of America was the big exception: with a half dozen cards at their limits and a series of late payments on a loan, other issuers have not tried this tactic on me. You might think that this indicates that they are bowing to public pressure, but I suspect that there's plenty of self interest involved. Universal default, injurious as it is to cardholders, is ultimately even worse for issuers. If anybody has forgotten the notion of a "run on the bank," then what's happened on Wall Street is a good reminder.

Raising rates is a bid to get the last bit of money from a borrower in trouble before he defaults. And of course it makes a default much more likely. Borrowers racing to pay off one card on which the rates have risen to some astronomical number will fail to pay off others. Or they will throw up their hands in disgust and punish the issuer who's raised the rate and so has no more leverage to use. Or worse still, they will give up and stop paying any cards. What exactly happens depends on the particular borrower. But the bottom line is not good. It is not surprising that universal default and similar policies have had only a short run: suicide pacts don't tend to last long. 

Wait, Who Scammed Whom?

It's always struck me as interesting that those who criticize Wall Street and those who sell Wall Streets products rely on essentially the same idea: that the game is rigged in Wall Street's favor. What else, after all, was the message of those old E.F. Hutton commercials that said, "When E.F. Hutton talks, people listen"? The implication was that E.F. Hutton had the inside track, that's why you were going to them in the first place.

In "Blame Main Street, Too ," today's story on Slate's spinoff site, The Big Money, I talk about how the current crisis didn't start on Wall Street. I've said that before: if you want to go to the root, you need to go to the suburbs of Los Angeles, the places where Countrywide and IndyMac and all the rest came from. It's not clear that Wall Street bankers saw just how spoiled were the goods the mortgage underwriters were selling them were (though Lehman and Bear should have--if they didn't know, it was only because they tried hard not know)--while folks like Countrywide's Angelo Mozilo. The difference between the mortgage underwriters and Wall Street is that Wall Street's stock in trade is pretending to know everything, while that of a Mozilo, with his absurd tan, is pretending to know nothing. That second, it turns out, can get you pretty far.

PS: Whatever happened to the great broker ads? Besides the E.F. Hutton ads (I don't think any legal department would let a bank get away with something so crass now) there was also the very different Smith Barney/John Houseman approach with  "We make money the old fashioned way. We earn it." After this Wall Street is going to need some major rebranding. John Houseman, unfortunately is deceased, but Fred Thompson's available, and good at that kind of growling.