Quote of the day: Moral Hazard

I don’t agree with everything in this Op-Ed, but these couple of paras caught my eye:

"The current crisis is the result of the normal ebb and
flows of credit cycles, and the free market will amply handle the
correction that is already happening. Calls for Federal Reserve
intervention or for other governmental involvement — including an
increase of the Fannie Mae/Freddie Mac lending limits — must be

In the free market, those that made bad credit
decisions must be allowed to pay the price, and only by paying dearly
can lessons truly be learned. Borrowers who were unwitting and took on
too much debt must learn that there are consequences for their actions.
Homebuilders that built too many homes or overpaid for land need to
face the consequences. Wall Street firms that provided credit to all of
these activities with too much laxity must also pay a price. This is
all part of a healthy correction.

All of these players reaped benefits during the
housing boom that preceded the current crisis. Certain homeowners were
able to temporarily live above their means. Homebuilder and bank
profits have been exorbitant, and shareholders and executives of these
companies have profited mightily in the boom. To not permit losses now
would be a direct violation of the free-market ideals at the foundation
of our economy."

Well said . . . 


Fannie, Freddie and the Housing Bust
August 16, 2007; Page A11

Note:   Mr. Penner is a principal with the firm Lubert-Adler and is the managing partner of PGP, a real-estate investment firm. In the 1990s, as CEO of Nomura Capital, he helped pioneer the application of securitization technology to real-estate finance.

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Discussions found on the web:
  1. Bob A commented on Aug 16

    Fundamentals and the Economy don’t matter any more.

    What matters right now is, at what discount are those folks that have cash ready to put that cash to work in stocks.

  2. Pool Shark commented on Aug 16

    Phily Fed business activity index comes in at 0.0 (yes that’s ZERO)

    Down from 9.2 in July.

    Consensus was for 9.0

    NO growth in mid-Atlantic manufacturing.

  3. Bob A commented on Aug 16

    And does anybody really have ‘visibility’ on where real estate prices are going to settle and what the ultimate writeoffs in bad loans are going to be?

    Isn’t the real washout in real estate values just now beginning?

    How many partially completed condo buildings are going to get shut down before they’re even completed?

  4. michael schumacher commented on Aug 16

    hard to not have a recession when there is no growth…..

    and Paulsen said something like:

    “business and funds will go under but our growth rate will remain unchanged”

    or something along those lines..
    It is curiously missing from the earlier story I read it in.

    I bet it will…

    Just like Schwab experiencing “difficulties” in answering the phones….


  5. Marcus Aurelius commented on Aug 16

    Yes. the washout is just beginning. This is going to get much ugler.

  6. dark1p commented on Aug 16

    holy cats! I agree with an op-ed piece in the journal!

    sorry, just had to say.

    speaking about schwab’s difficulties in answering the phones, our 401k plan here at work has only about 10 or 12 choices. all stock and mixed-bond funds that are getting hammered recently, with one money market fund.

    I can currently get info and a prospectus for all of the funds on the website, except for….wait for it….the money market fund. those links have been producing nothing but error messages all week.

    how curious.

  7. michael schumacher commented on Aug 16

    the write downs on home prices will not really begin until the rest of the loans that are in the system (before the sweeping changes) are closed and completed. once the new “rules” start taking affect (with the appraisal’s only being able to use >3 months ago) will you see a systematic take down of the prices or they (lenders) will simply close up shop and make a bad situation (tightening standards) worse.


  8. MarkTX commented on Aug 16


    the Schwab web site just locked-up on me too.

    No phones also..?????

    That would seem to qualify as HAZARD, now

    would it be qualifiy that as

    Moral or Unmoral Hazard?

    Either way-this reminds me of 2000-2002,

    there were days where you could not move a position if you wanted to.

    Good Luck to all!

  9. Sammy20 commented on Aug 16

    FYI – Vanguard has been locking up all day as well.

    I want Art Laugher & Ben Stein on Kudlow tonight…I need to be reminded how the “market” has it all wrong.

  10. Bob A commented on Aug 16

    …and then there are the margin calls

  11. michael schumacher commented on Aug 16

    I still have been unable to talk to anyone (not that it would matter) but that’s ok..no big sales or buys for me. Started a short in EWZ this morning……working out so far.


  12. mhm commented on Aug 16

    “The tsunami risk for Japan has now become literal rather than the figurative wave of selling seen in the markets. Kyodo is reporting a tsunami alert for Japan”s Pacific Coast areas from Okinawa to Hokaido. Any actual impact is likely to see foreign asset repatriation or sales of shares on the Nikkei by insurers in order to offset damages, adding to pressure on USD/JPY.”

    What is next? Godzilla, maybe…

  13. michael schumacher commented on Aug 16

    CBOT just (recently) raised those pesky margin reqs. too

    as it rises on a parabolic slope so it falls on one….

    I heard that somewhere but can’t recall who said it so forgive me for not giving credit.


  14. michael schumacher commented on Aug 16


    Godzilla was created a few weeks ago by the reactor “venting” into the open sea(japanese e-quake)….now all we do is wait about 100 years and then we get Godzilla…….or a margin call about now…it would have the same affect-LOL


  15. steve commented on Aug 16

    they have NO IDEA what is going on!

    open the window!!!

    it’s ARMAGEDDON!!!

    Call someone, please,


  16. Sammy20 commented on Aug 16

    I guess Bernake should still get an A since he is doing such a fabulous job hiding….I mean staying the course.

    Kudlow will be calling for Bernake & Greenspans heads soon after recently praising both of them.

  17. steve commented on Aug 16

    they have NO IDEA what is going on!

    open the window!!!

    it’s ARMAGEDDON!!!

    Call someone, please,


  18. michael schumacher commented on Aug 16


    What should he do?

    What can he do?

    Is that his job?

    The last answer is no……


  19. KirkH commented on Aug 16

    Rebounding, does this mean the HBE (Hot Ben Injections) are working?

    Is it possible we’ll see a recovery for a week or more until everybody realizes that housing issue really isn’t just a blip on the radar?

  20. John Forman commented on Aug 16

    Very well put op-ed. The individual trader/investor is getting to see first-hand that institutional folks are just as susceptible to the fear and greed cycles as they are.

  21. Lord commented on Aug 16

    Should it add furniture manufacturers that furnished those houses, industrial materials producers that supplied the housing market, insurers that insured them, car manufacturers supported by equity withdrawals on them, 401ks for investing in their stocks, etc.? How far should this go? Do we even have any control over it?

  22. techy2468 commented on Aug 16

    Fidelity website is not allowing me to do anything today…i am unable to even resent my password.

    maybe peak traffic…or maybe they dont want me to move my funds to cash..

  23. michael schumacher commented on Aug 16

    most all online sites have had or are experiencing “technical difficulties”

    the best line from the schwab phone tree from hell: “Please call back later”



  24. Sammy20 commented on Aug 16


    I am not saying they should do anything, they made this bed and now they must sleep in it.

    All I am saying is please don’t praise these people and give them A grades. They have created an absolute mess and have mislead the entire public all along the way.

    If you want to claim he is doing the best he can that might be true, but if I took over the titanic and did nothing but watch the ship sink…the best grade I should receive is a N/A.

  25. Fiat Lux commented on Aug 16

    If You Play With Fire …

    … you tend to get burned. Noted in passing. Thanks, Barry….

  26. michael schumacher commented on Aug 16

    i think the perception of the Fed (from the short side) has changed dramatically. I was in the camp that said the fed had no clue what they were doing….up until they left rates unchanged at the last meeting. two days later they feed the market cash but say nothing about the policy meeting of two short days ago-pun intended…

    Unless the powers that be, current administration, can change the Fed’s stance then we will see no rate cut and our economy will begin working off this excess that just so happened to coincide with Paulsen AND Bernancke’s hiring. we are seeing Bernancke “saying” he won’t lower rates but we all know the power of politics.

    and BTW we already have a reduced rate….check out the 10 year…


  27. winjr commented on Aug 16

    “most all online sites have had or are experiencing “technical difficulties”

    Perhaps some sort of capitulation by the “little guy”? I’ve closed out most of my put positions, now dabbling in calls. Geez, how much longer can this go without a bounce?

  28. DC commented on Aug 16

    Forget Hillary or any other politician. I’m wondering if anybody knows where the hedgies and quants go for drinks. Some of my mechanic friends from Hoboken would like to buy them a round.

  29. john commented on Aug 16

    While I agree with Mr Penner, the payoff at the end of his piece was that the sub prime mess was largely the responsibility of Fannie and Freddie. ??

  30. MBL commented on Aug 16

    Amen. I’m not a financial expert, but for years I’ve watched my firmly middle class friends buy houses FAR out of their range. When I was looking to buy a house, the banks I visited said I could have my dream house if I wanted. Now suddenly there’s a crisis.
    It’s certainly not sudden. It’s been years in the making. Banks shouldn’t be bailed out for this any more than they should for all the credit debt they’ve created by giving 18-yr-olds pre-approved credit cards with Cash Advance in 72 pt. type flashed on the back of the envelope.

  31. MarkTX commented on Aug 16

    Look at all that buying in the last hour….

    Puts a warm feeling in your heart doesn’t It!

    Hell, maybe all the retail investors are now storming into the market….


    Are the online borkers websites up and running NOW?

  32. Peter Davis commented on Aug 16

    I can only imagine what Kudlow and the gang were saying tonight: “See, Goldilocks lives! Buy! Buy! Buy! Stocks are cheap!”

    Too bad I missed it; I would have loved to have heard Doug Kass with that group.

  33. Mysticdog commented on Aug 16

    Oh, come on. Home owners did not “live above their means”. This bubble was spurred on by insane credit, and most of these people were buying houses they could have afforded 7 years ago except the house prices got inflated by speculators to where the only way they could afford them was through the insane credit terms.

    There was absolutely nothing real that happened over the past seven years to drive a $100,000 house to be “valued” at $200,000+ . It was pure speculation, and the people who got stuck buying an arm to afford a $200,000 house with 1000 sq. ft. absolutely deserve a break.

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