The housing crisis is rocking the entire world economy. How can we stabilize the economy and stop the bleeding? Congress is working on legislation that will impose stricter regulation on the mortgage industry. This is certainly an excellent idea. Basically, the industry has been self-regulated and you can see where that got us. It is important to remember who is culpable for this mess. Any solution that involves a taxpayer bailout is unacceptable. A taxpayer bailout would in effect be rewarding bond-rating services like Moody’s who gave triple-A ratings to mortgage backed securities and exotic derivatives. A taxpayer bailout would reward the mortgage industry and malfeasant institutes that made questionable loans to borrowers who could not afford them and would only further encourage risky lending practices. A taxpayer bailout would be tantamount to blaming the victim.


Bond rating services such as Moody’s, Standard & Poor’s, and Fitch are in the business of providing ratings for corporate bonds and securities. The ratings that these agencies provide are an estimate of risk, not a buy or sell recommendation. However, when Moody’s gives a good rating to securities, they become very marketable, even if the securities are comprised of a pool of mortgages given to risky sub-prime borrowers. The only reason that banks were willing to make these risky sub-prime loans is because they knew they could pass the risk off on to Wall Street. Banks no longer had to wait 20 or 30 years to get their money back from homeowners. They could sell these loans into securitized pools and realize their capital quickly. This enabled them to issue more loans at a much faster pace and thereby exacerbate the situation. Of course, this was extremely profitable for the banks as well as the rating agencies. From 2002 to 2006, Moody’s profits nearly tripled and in 2006 reported net income of $750 million. You don’t need an MBA to realize that the rating agencies suffer from a serious conflict of interest.


The Federal Reserve has taken action unprecedented since the Great Depression by lending money directly to a major investment bank, Bear Stearns in hopes that this will reassure investors and stabilize the market. The CEO of JP Morgan Chase, which purchased Bear Stearns, said, “There was a large failure of common sense”. I think he is being to kind. I think it was a successful attempt to make record earnings and a large failure to self-regulate. Why should taxpayer dollars back these risky loans? The stock and bonus plans offered to the CEOs of investment banks are worth more money than most of us will ever earn in a lifetime of honest work. The reason they decided to go ahead and make such risky loans is that they were rewarded handsomely for short-term profits and stock gains. Now that things are falling apart, we are the ones paying for it, not them. From 2004 to 2007 top executives at Bear Stearns, Citigroup, Goldman, J.P. Morgan, Lehman Brothers, Merrill, and Morgan Stanley received about $3.63 billion in salary, bonuses, and other benefits. Now these same seven companies are taking $96 billion in write-downs and yet their CEOs are allowed to keep there ludicrous earnings.


Congress is currently working on housing legislation that creates a regulator to oversee Fannie Mac and Freddie Mac, two companies that provide the majority of funding for home mortgages. This legislation also calls for the Federal Housing Administration (FHA) to insure as much as $300 billion in refinanced loans for struggling homeowners. The Congressional Budget Office estimated this insurance program would require $2.7 billion in government subsidy, and by government subsidy, I mean taxpayer’s dollars.


This legislation could potentially put the taxpayer on the hook if homeowner’s who receive government guaranteed loans, default on these loans. The proposed program would protect borrowers who owe more on their homes than they are worth. For these borrowers to qualify for the new government insured loan, their lenders would have to cut the size of the outstanding principal until the borrower actually has equity in the property. The program has the backing of the Federal Reserve Board and the FHA would guarantee the new loans. However, should we help the borrowers that got in over their head? We should hold the lending institutes culpable for making these sub-prime loans; after all, they were the ones who profited from them. In effect, this would be punishing the taxpayer for the bad judgment and questionable practices of others.


There are houses in my neighborhood that are in foreclosure. This affects the value of my home. I just received the financial statement from my IRA, and it has devalued significantly. I am already paying the price for the mistakes and poor judgment of others. It would be fair that those who profited should pay. When the CEOs of these companies are penniless and losing their homes, then I might be willing to use taxpayer dollars to bail out struggling homeowners, otherwise, using taxpayer money to bailout the economy is like blaming the victim.