Voices

A game of risk

The decline and fall of the subprime mortgage market

Issue: "Food fight," May 3, 2008

I took a job with a lady landscaper the year after my husband died, and I remember one day she said to me, "Nobody cares about your business as much as you do."

At first I took umbrage at the remark and its implied slight to the quality of my work. But as I thought more on it, I realized it was absolutely true: As assiduously as I pruned and weeded, there was the small voice in me each day that said, "I'm going home at five," with its attending diminution of dedication from a 100 percent to a 99 percent.

This is the anecdote with which I will explain the sub-prime mortgage crisis to my kids at dinner tonight. There is a difference, I will tell them, between playing with money that's yours to lose, and playing with money that's not yours, and that's so hedged by a Byzantine web of accountability that no one knows where the buck stops.

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We'll role-play this, my kids and I, to show the difference between the way financial systems operated in the old days and today: Say 10 years ago you went to the bank for a loan to buy a house. The bank would make sure you had assets worth at least as much as the loan amount so that if you couldn't make good on your debt, it wouldn't lose out on you.

Say now the rules have changed. By recent arcane developments in banking, the money institutions can give out loans like candy because they don't incur any risk (or so they believed). There are at least two reasons for this uncharacteristic headiness of somber men in black suits: One is that housing markets are going up astronomically. Even if you're poor today, just wait till next Tuesday and your house will rise as fast as Zimbabwian inflation.

Second, some genius figured out a way to pass off the risk of your loan to somebody else. How that works is this: House values are so sure to rise, and therefore your loan (considered an insane gamble in more fuddy-duddy times) is so sure to be paid off, that the very certainty of your paying it is considered by the lending institution to be an "asset" on their ledgers-an asset that they will now turn around and bundle with other like assets and sell to someone.

This third person in the mix, only slightly less insane than the banker, will want some assurance if he's to invest in such a harebrained thing as your subprime mortgage. So he asks for, and is granted, for a negligible fee, insurance against any mess-ups. Only it is very carefully not called insurance, lest it be subject to regulation. It is called a "credit default swap." (I may throw in Psalm 12:4 at this point and skip tonight's Bible study.)

Then the bank decides it had better get insurance too (since this is a harebrained scheme), and the bank gets a policy from some little insurance company that is convinced it carries absolutely no risk either.

Isn't this wonderful?! Nobody's risking anything, and everybody's derriere is covered. The bankers have undergone a personality change as radical as Mr. Banks' in Mary Poppins, and they turn no one from their hallowed halls. What do they care if you pay back your loan or not? They've gotten their commission and sold your debt to someone else-who probably sold it to someone else. Hey, does the debt even exist? This is fun. Banking used to be scary when there was worry that the mortgage applicant might lose his assembly line job at Ford and start skipping payments.

Meanwhile all those bright boys on Wall Street, who inhabit a stratum somewhere below the Pantheon but above mere mortals, are the only ones in the know. They realized at some point in their ascendancy, like Boris did in Tolstoy's War and Peace, that there are always two systems and two moralities side by side in this world-the off-the-books one they have created for their club, and the official one that applies to the rest of us.

There is "the hint of something which is not quite in accordance with the technical rules of fair play; something which the public, the ignorant, romantic public, would never understand" (C.S. Lewis, The World's Last Night and Other Essays).

If you have a question or comment for Andrée Seu, send it to aseu@worldmag.com.

Andrée Seu
Andrée Seu

Andrée is the author of three books: Won't Let You Go Unless You Bless Me, Normal Kingdom Business, and We Shall Have Spring Again. Follow Andrée on Twitter @Andreespeterson.

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