Monday, September 08, 2008

The Smartest Guys in the Room - Again

Just seven years ago, we had the failure of Enron. Bethany McLean and Peter Elkind wrote a best selling book, ENRON: The Smartest Guys in the Room which was the inside story of one of history's greatest business scandals. The investors and employees lost everything while the top executives walked away with over one billion dollars. Before that back in the late 1980s and early 1990s, we had the failure of the Savings and Loan industry. That cost the taxpayers about $125,000,000. Again there were a lot of 'smart guys' that walked away with the profits for flipping properties and with commissions for making loans to risky real estate ventures. Somehow the 'smart guys' think up some tricky accounting systems that allow them to look brilliant because they seem to be able to make things so complicated that everyone else hates to look stupid and point out that the emperor has no clothes.

Now here we are again. The Smartest Guys in the Room thought they would outsmart economics and plain old accounting. This time the Smartest Guys in the Room head up Fannie Mae and Freddie Mac. I'm not going into all the details about the government taking conservatorship of the two companies. You can read that in the newspapers, Newsweek, etc. But I'll quote Mr. Paulson, Treasury Secretary,

“This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement,” he said. “A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation.”

We've seen on TV and read about all the risky home loans that have been made in the last five years by mortgage companies and banks who received commissions and bonuses on the volume of business they generated. Loans to people who could never pay the loan back, loans for more than the worth of the house. Many of those loans are now in foreclosure with more to follow. What this conservatorship boils down to is that the government will directly back the great majority of the nation's home mortgages and that includes all those in foreclosure and that will be in foreclosure. And who is the government? And where will the money come from? Us the taxpayers! Yes, we have to pay the cost of these bad loans because the money has to come from somewhere.

This makes me furious! All of us who bought homes that we can afford, all of us who saved for retirement or to put our children through college, all of us who lived on what we earned and paid our debts, should be furious. Now we are saddled with debt that was caused by 'the smart guys' who thought they could game the system. It threatens everything about our standard of living, everything about our grandchildrens lives. Where were the government regulators? Where was the Congress?

I don't want this to be a political blog but I'm angry and I just had to write about it!


Babs said...

About two years ago I read about the "executives and their bonus packages" at Fannie Mae and Freddie Mac and was insulted. I'm not the least surprised, based on what I read that it has come to this. I totally agree with you.....It's disgusting!

pitchertaker said...

Maybe we can vote for change.


Billie said...

Babs, Washington Mutual is replacing their CEO and I'm sure his contract calls for some type of separation bonus regardless of his performance and being a party to these bad loans.

Frank, if the Democrats had been bringing up this looming disaster but didn't control congress, I would say voting for a change would make a difference but unfortunately both Parties did nothing.

Everytime I see anything about this I get pissed again!

Anonymous said...


You should be angry with the regulators. There were already plenty of laws on the books to prevent what happened, but the Bush laissez faire attitude prevented the regulators from doing their job. In fact the State of California tried to prevent some of this nonsense, but was sued by the federal government which said their rules took precedence. So the State of California was forced to stand by helplessly while federally-chartered institutions made loans of poor quality, and loans that could not be repaid.

Also fault Greenspan for keeping interest rates too low for too long, which made fixed-income investors nearly desperate for yield, forcing them to buy ever-riskier paper.

In my view, neither Greenspan nor the Bush administration are getting anywhere near the blame they deserve.

As for the executives? Sure, a bunch did slimy things. But the larger blame lies with the system which failed to work.


Kim G
Boston, MA

P.S. I work in the financial markets, and have been watching this situation closely for some years.