Dominic Lawson: The borrowers must take their share of the blame too

Friday 26 September 2008 00:00

From: Minister of the Treasury Paulson

Subject: Request for urgent confidential business relationship

Dear American: I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude. I am minister of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of US$700bn. If you would assist me in this transfer, it would be most profitable to you. This transaction is 100 per cent safe. This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as next of kin so the funds can be transferred. Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to so that we may transfer your commission for this transaction. After I receive that information I will respond with detailed information about safeguards that will be used to protect the funds.

Yours faithfully, Minister of Treasury Paulson, Nigeria, Washington DC

Never let it be said that the dealers on Wall Street and the City of London have lost their sense of humour, even as their jobs and share options slide down the financial plug hole: this spoof of a Nigerian crook's spam email has been doing the rounds of the trading desks on both sides of the Atlantic.

It also happens to sum up nicely the reasons why Congressmen – and large sections of the public they represent – were so outraged by Hank Paulson's peremptory plan to bail out the banks by buying their toxic loans with a Federal cheque of $700bn. That's $700,000,000,000. Only it might be more: it could easily be $1 trillion. That's... oh, never mind, you get the point: it's thousands of dollars from the pockets of each and every American taxpayer.

What's more, no-one really knows if it will sort the mess out. Academic economists in their hundreds, including a brace of Nobel laureates, have written a public letter saying that this is not The Answer (although they are less united in agreeing what The Answer might be - and even what The Question really is).

The rage against Wall Street – burning all the way from the groves of academe to the dirt farms of Kansas – is eminently understandable. Why should "ordinary hard-working Americans" – or even lazy ones, come to that – have to be made to pay for the follies of bankers? Bear in mind that while in the UK bankers are still thought of as respectable, in America there has long been a generally contemptuous attitude to that profession, stemming in large part from the 1930s when thousands of banks collapsed, and with them the savings of millions.

Yet at one and the same time, Americans have also been the best friends of easy-lending bankers. What, after all, is the cause of the toxic debt now gumming up the system, but an accumulation of loans which enabled millions of Americans on low incomes to buy homes they could never have dreamed of owning without credit? Sliced, securitised and sold, these loans have poisoned the banking system for one reason above all: the homes they paid for have collapsed in value – most notably speculative new-builds in the coastal regions of Florida and California – and the owners either can't or won't keep paying the mortgage on properties worth a fraction of the debt.

Yes, many of the loans should never have been offered – such as the so-called "no-doc" mortgages, in which the borrower agreed to pay a higher rate in return for the privilege of not documenting his income. Yet it requires two parties to sign a bad loan agreement: if a borrower thought it didn't matter that he couldn't pay the mortgage for long, in the belief that he would sell the property quickly and make an instant profit, then it's not obvious that he is less culpable than the lender.

This happened on a vast scale, and to the extent that it did, this debacle can not simply be described as Main Street America bailing out Wall Street: as Steven Malanga of the Manhattan Institute points out, the mortgage mess began on Main Street. Fannie Mae and Freddie Mac, the mortgage colossi which have just been bailed out, were set up by Franklin Roosevelt as part of his New Deal, designed to provide loans to "ordinary Americans" who would otherwise find it hard to get credit: they always operated under an effective Treasury guarantee, which partly explains why their managers were so cocksure and even indiscriminate in their lending.

Nonetheless, those who took on loans they should have avoided – even if they fibbed a little about their ability to repay – deserve more of our sympathy than the men and women who have made millions slicing and dicing those dodgy debts: the latter may now be out of a job, but they will almost certainly not have to forfeit their homes.

While Congressmen of both parties are grandstanding in their current abuse of Wall Street – they gave the bankers everything they wanted up until now – the US Treasury's package does genuinely offend against our sense of natural justice. It irks that Hank Paulson, who was until recently the head of Goldman Sachs, launched his bailout just at the moment when his old firm started to feel the chill wind of the short-sellers.

It irks even more that, while at Goldman, Paulson had recycled into the system a lot of the bad debt that Fannie Mae and Freddie Mac originated: indeed, Paulson put the former boss of Fannie Mae, Jim Johnson, on to Goldman's board, and Johnson in turn chaired Paulson's remuneration committee. Even Nigerian spammers might have struggled to think up that one.

Still, as they say on Wall Street, that was then and this is now. Much as most of us would like the banks to be treated as Enron was – despite its very close links to George W Bush, his administration shunned its pleas for a bailout – the fact is that banks are different: if something is not done to stop the current implosion in credit there is a risk of the sort of de-leveraging chain reaction which turned the Wall Street crash of 1929 into the Depression of the 1930s.

Dr Ben Bernanke, the current chairman of the Federal Reserve, based his academic career on a study of the causes of the Great Depression: it is his quiet, anxious plea for this bailout of the banks, rather than Hank Paulson's peremptory demand, which will swing Congress behind the rescue plan. Still, it stinks.

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