The Great ’08 Audible (Editorial)

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I heard Randy Dennis, bank consultant extraordinaire, speak in October at Commerce Arkansas event at the Statehouse Convention Center. Dennis, whose last name seems like it should be his first name, spoke about the Great Wall Street Bailout of 2008 that morphed inexplicably into the Great Bank Bailout.

Dennis used a football analogy that I barely understood and can’t quote precisely, but the punch line was this: The whole bailout was an “audible.” I did understand that part: Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke were changing the game plan on the fly because they realized the play they had practiced wasn’t going to work when they saw what was facing them on the line of scrimmage.

I wouldn’t use a sports analogy. The bailout reminds me more of our big driving tour of the American West back in July, when our GPS system occasionally told us to turn the wrong way onto one-way streets and once tried to get us to drive across a fenced-in pasture. When you are in unfamiliar territory and the indicators you were counting on clearly aren’t working, sometimes you just have to make a choice and hope for the best.

As much as we like to think of business and government as being rational and almost scientific, sometimes we get painful reminders that the people running these huge operations are only human and subject to the common human failings. We’re hearing a lot about greed, and there’s no doubt that’s been a root cause of the meltdown of our financial situation, but greed isn’t exactly a recent addition to the list of the deadly sins.

What made this greed different from run-of-the-mill corporate greed is that so many players had a stake in it, and the ultimate victims thought they were actually beneficiaries. This wasn’t just high finance; this was an elaborate con game.

If you don’t believe me, you haven’t read the internal messages from Standard & Poor’s and Moody’s Investor Services, two of the credit rating firms that continued rating mortgage-backed securities as investment-grade long after their own analysts realized that they were really a ticking time bomb.

“Let’s hope we are all wealthy and retired by the time this house of cards falters,” one S&P employee told a colleague in an e-mail that became a centerpiece of a congressional hearing last week.

A Moody’s executive wrote, “These errors make us look either incompetent at credit analysis, or like we sold our soul to the devil for revenue.”

Homebuyers started to believe that houses – houses – were a get-rich-quick investment and were being guided into unsuitable mortgages that left them vulnerable to even small fluctuations in interest rates and home values. Mortgage bankers and brokers were raking in fees hand over fist and shoveling the risk upstream. Investment banks were packaging these time bombs and getting rich selling them to clients as low-risk investments – which was easy to believe when they carried those seals of approval that the rating agencies were getting paid handsomely to bestow.

And the federal government, in the hands of people who genuinely believe that government is a bad thing, maintained its hands-off stance until everything was so fouled up that no one was really sure how to fix it.

Meanwhile, some of us in the bleachers were starting to doubt our own sanity. I know I was. I kept asking myself, and anyone else who would listen to me, how housing prices could continue to inflate at 15 or 20 percent a year in some markets when wages weren’t growing at anything like that rate. Wasn’t there a limit to what people would, or could, pay to live in 1,200 SF?

Now Americans, and American businesses, are feeling the need to “deleverage,” as Randy Dennis noted in his talk last week. Unfortunately, it’s happening at precisely the same time that the government is throwing money at banks to get them to make more loans to keep the economy churning.

Dennis seemed hopeful that, with the bailout money in hand, banks would reclaim their traditional advisory role and be less accommodating to borrowers who threaten to go to the bank across the street if they don’t get the loan they want. Like our GPS system, the banks may have to tell some clients that they’ve gone too far and need to make a legal U-turn.

(Gwen Moritz is the editor of Arkansas Business based in Little Rock and may be contacted at [email protected])