Wednesday, September 17, 2008

Who's to blame for the recent financial collapse? Maybe you!

Today, the United States Government announced that it will offer an $80 billion dollar aide package to failing insurance company American International Group, commonly known as AIG. While experts agree that this amount might not be enough to prevent the company from eventually collapsing under its own weight, there are others who argue that the government should not have stepped in at all and should have let the company fail.

I am one of those people.

The recent Wall Street collapse of giants such as Fannie Mae, Freddie Mac, and even AIG can largely be tracked directly back to the whole sub-prime mortgage problems that started to come to light late last year and early this year.

In a nutshell, companies such as Countrywide Financial got people financed through banks who were willing to extend loans to people with high risk. Often, these people had little or no verifiable sources of income and, in some cases, didn't even have jobs. Banks made bets on these people and companies like AIG made bets on the banks.

Both lost.

When the sub-prime mortgage industry collapsed earlier this year, the banks who made these exploitative loans were the first to be hit. Losing billions of dollars in a single week, three of the five major U.S. banks were forced into seeking protection and the government stepped in to help. Companies like AIG, because they insured the nearly bogus loans these banks issued, were soon effected too and quickly found themselves in very hot financial waters.

Really, the insurance failures shouldn't surprise anyone once you understand how closely these companies were tied to bank and mortgage companies. It's all a domino effect and, while it might not seem like it, it will end when the market is cleaned up of the sub-prime mess. And, while the U.S. economy remains fairly strong, I believe we can reasonably expect more companies in the sector to fail just as a result of their own involvement in the wholly corrupt sub-prime industry.

What I do not believe is that the government should come to the rescue of these companies. They understood the risks involved in dealing with a specific demographic of people and decided to accept the risks because they thought they could make money. There is a reason why our credit rating system exist: it is to allow people to gauge the likelihood of repayment failure should they extend payment to you. When someone has a low credit score, has defaulted on loans, has a bankruptcy, or doesn't have a job or other source of income, it could reasonably be assumed that they are highly likely to default on a new loan. If you choose to extend credit to them anyway, then that is a risk you are taking in the hopes that things will tip in your favor and you will be the loan they choose to repay.

You'll be wrong most of the time.
You'll lose money most of the time.
You don't form an entire industry on this big of a bet.

Companies like Freddie Mac, Fannie Mae, and AIG took a bet and lost. That's their problem, not the American taxpayers'. These companies should be allowed to fail because, when they accepted the risks, they did so with the understanding that things might not go their way. The government is not the insurance companies insurance company. Nor should it be banks banks or lenders lenders. Businesses should stand or fall based on their decisions and actions. Nothing more.

Now, don't think I'm placing all the blame on these companies doorsteps. I blame the consumers who got these loans just as much, if not even more, than the companies who issued them. They knew they should not have gotten these loans. They knew they couldn't repay them. They knew that, eventually, there was a very good chance they would default.

That is why they went to a high risk lender in the first place.

They made a stupid and poor financial decision and now they are having to pay for it. It's sad that they lost their home but, really, it's a home they should not have had in the first place. They were not qualified to have the type of debt they assumed and they now have to pay the piper.

The blame for the ongoing collapse of Wall Street? It rests on AIG. It rests on Freddie Mac. It rests on Fannie Mae. But it also rests on the shoulders of every single person who applied for and got a sub-prime loan. That's not a popular thought. But it's honest. And it's true.

Once could almost call it a conspiracy of idiots. Unfortunately, we all have to pay for it now.


eddie said...

Everything you say is true. And, yes, I agree the government should not be the savior especially if it means more taxes for the masses. Granted, stupidity and lack of responsibility on the part of those who took out these loans, but I have to put more of the blame on the ones who are betting on it,e.g. bankers/mortgagers - however you want to call them. In a world where big executives have the bulk of the profit pie in a given company, they should be the ones who should rescue their own banks. They must have approved these risky propositions at some point ore another. After all, I would bet they are still sitting pretty with lots cash in the bank. None of them get hurt during this. Only their egos.

Anthony Papillion said...

I couldn't agree more Eddie. I think it's unconsionable that they've received millions of dollars in compensation while their companies sunk.