Hallelujah!
Like everyone - well all 0.000001% of us (humans) that work (or worked) on the ’street’ - I’ve got an opinion on the current state of the sub-prime mortgage market in the States. And I’ve been wrestling with the dilemma of whether or not to weigh in…
Fortunately Going Private has done all the heavy lifting for me:
The Going Private reader, most likely being of the free market and capitalist ilk, will also likely wonder “where’s the problem?“ (my emphasis) as CLOs tend to be sophisticated investors and certainly are (or should be) well aware of what they are buying and able to (even if they, by choice, do not bother) carefully manage the risks thereof.
…
The Going Private aficionado will reply, “who cares?” If the alternative to the occasional blow-up is a paternalistic, top-down economy designed to protect sophisticated investors from themselves then the Going Private reader will prefer the blow-ups (my emphasis) (or retire from worldly affairs to the shelter of their Lake Como estate). Going Private readers believe in freedom, and consequences.
Precisely.
Nobody forced anybody to buy the securities that allowed this exuberant credit market to exist. High yields are generally a signal of higher risk - ie that means sometimes things can go horribly wrong. The only possible villain in the chain is if/when unsuspecting end customers are roped into buying something they clearly don’t understand and that could damage (their financial) situation significantly (using some sort of net worth/VaR type test.) I’m sure their are cases of this can of unscrupulous marketing but the shrill cry of politicians looking to ‘protect’ people from their own folly mostly leaves me cold. The 26 year old with 8 properties, no equity and IO-step-up mortgages on the whole package might or might not be clueless, but is unlikely to have found himself in this position due to ‘mis-selling’ (to use the UK euphemism.)
If the government wants to protect ‘the little guy’, why not introduce some sort of minimal quantitative test based on VaR, customer cashflows and balance sheet - kind of a minimum capital requirement for individuals to create a tolerated ‘threshold of riskiness’ beyond which the ability to lend is subject to a much much higher burden of proof of understanding and examination of circumstances (note I don’t think it should be made impossible - there are always exceptions and a hard frontier would just encourage gerrymandering, probably ultimately to the extent of rendering the test meaningless where it could make a difference.)
The irony (should the legislators and regulators ham-fistedly clamp down on this market) is that it has been one of the most successful markets on the planet in terms of providing credit to poorer and historically (financially) marginalized segments of the population, and it risks being stymied just at the same time as popular/political conciousness is finally waking up to the fact that access to credit and the financial system is probably the single most important factor in driving development and poverty reduction leading to a boom in the profile and funding for micro-credit institutions around the world.
If the politicians want to worry about something perhaps they should take a hard look at the failings of public education to reduce the frightening levels of financial illiteracy in the population…but of course that would be a long hard slog, with no easy soundbites - not much fun in that.
