Rebuilding Wall Street

Once upon a time, one of my sisters on saw a man selling “stereos” in the street. The man was selling the “stereos” at a bargain. A fraction of what they are actually worth and sold for in stores, the man told my sister. The man had an actual stereo on the ground which he used as display. Next to the displayed stereo, stood two boxes. Both “stereos” were packed in boxes and ready to go.

Without hesitation, my sister decided to buy one. “What if it does not work?” I asked her. “It works” she replied with confidence. “Maybe he stole them”, I told her in my effort to keep her from buying. “He’s selling them in the street, I don’t think he stole them” was her reply.

Needless to tell you, that my sister got herself into what we’re calling today the mortgage mess. When we got home, we opened the package. To my dear sister’s surprise, inside the box, she found pieces of bricks wrapped around newspaper and tissue paper.

If you ask me what happened to the “stereo” that she paid for, I’ll tell you that you’ve missed the point. If you’re getting the gist of this, keep reading.

Before I even dare mention Deregulations, Regulations, too little of this, too much of that, I think of the people who decided to buy these “mortgage” backed “securities”. Why not? Why would anyone buy a box without knowing what’s inside of it? Theories, politics, Demagoguery and Rhetoric are plain barriers. Don’t buy it if you don’t know what it is, provided that you’re buying a lottery ticket. By now, it is redundant.

The second point is, lack of common sense. Why would anyone buy something for which they can’t pay? Ok, speculators, flippers or investors buy with the hope of turning a quick profit if the price goes up. Now, the price went down, that’s their problem. They took the risk and they have to learn to live with it. In a way, it is capitalism and it is fair. No one should bail you out if you gamble and lose. If you can’t weather the storm, best to evacuate.

The third point is an issue of making informed decisions. Many homeowners are too stupid to know that they can’t afford it; some are addicted to buying so they buy. Some have no clue and have a way to buy so they buy not knowing what they are actually getting into. We live in a country where too many people buy on credit and don’t think that they will eventually have to pay for what they buy. That group would benefit from basic financial education and basics budget. The Treasury Department should include financial education for the general public as one of the steps to remedy this situation.

On the hand, there are those who lose their jobs, become ill or lose their financial means-they, must be in everybody’s mind.

Who’s to blame? Who made the wrong decisions? Who just brought for the sake of buying and a making a fast buck? While resolving problem is of primary importance, no one should try to shove the dirt under the rug.

In all of this mess, there are questions of ethics and basic financial literacy.

Almost everyone who bought into this mess relied on the independent, objectivity and assessment of rating agencies. Rating agencies’ job is to provide a rating system that helps investors evaluate the risk associated with making investing be it in a specific company, investment market or instrument. In order for the information to be reliable, Rating agencies must remain objective, independent as not to allow their clients to interfere with their jobs, credible as to their capability to assess value on a timely basis and transparent to discourage any subjectivity or conflict of interest. If you were to ask me that if a client pays you to rate its merchandize and if after you do, the client accepts your evaluation, then the information is most likely fair. Should the client go to another rating agency because the client is unhappy with your rating then get another evaluation, I’d say something is wrong with that scenario. Now, if we were talking about cosmetic surgery, I’d have given you a different answer. Some folks work on commission.

To return to the first point, relying too much on questionable and unverifiable information is a poor choice. Someone somewhere should have realized, that there is no way possible, that any company could review mortgage applications and credit histories for millions of mortgages to assess their worthiness over and over and over. Now, you either had a lot faith, had never heard of pyramid schemes, enjoy a little bit or Russian roulette or hoped that it would not blow up on your clock.

Of the necessary solutions, should the first call be for actual neutrality?