The Law of Unintended Consequences (Part 5)

And unintended consequences are everywhere.

One of the continuing consequences of the bailouts in 2008 and 2009 is a general mistrust of “bankers.” The capital issues at banks like Citi, Bank of America, and Morgan Stanley required a massive equity buy-in by the Treasury in order to maintain their solvency. But the term “banker” became a four-letter word—bankers like Dick Fuld of Lehman or Ken Lewis at Bank of America collected seven-figure bonuses even as their institutions either originated or acquired other banks that originated “ninja” mortgages: borrowers with no income, no job, and no assets.

But the bankers I know are members of the Rotary, serve as volunteer firefighters, coach their kids’ soccer team, and help out the United Way. They’re engaged with their communities, taking local deposits and turning them into local commercial and residential loans. But it’s really easy to talk about tar and feathers, when what’s needed is nuance and understanding.

Now Sheila Bair is weighing in with her memoir of the crisis. Not surprisingly, she tells a sordid tale of bailouts and missed opportunities, and casts herself as the tragic hero. She ticks off a list of all the things they didn’t do: help homeowners with underwater mortgages, clean up bank balance sheets, and so on. Of course, when you have a debt overhang, it’s easy to talk about debtor relief. Bair doesn’t offer any specific plan—just a vague sense that the government spent too much on bank bailouts and not enough on consumer bailouts.

But that’s the rub, isn’t it? We’re still in an economy where perhaps 10% of the housing stock is still under water. Every time the economy ticks up, along comes another over-levered sector to smack it back down. That’s why it takes some time to get out of a debt overhang.

Talk is cheap. It’s the only thing politicians never seem to run short on.

Douglas R. Tengdin, CFA
Chief Investment Officer
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