Moral Questions?

Many have asked me if there is any moral hazard in walking away from an underwater mortgage? To which I say? Do you think the CEO's of BOFA, GS, and JP think there is a moral hazard in financing their trading books with money raised via the FDIC's TLGP?

I have posted previously that even though most of the banks have paid back TARP, they are far from being under the hook of the US. Taxpayer.

http://tradersutra.blogspot.com/2010/01/bank-pay-back-tarp-who-cares.html

So the idea that the banks should not be subjected to Obama's Tax plan doesn't hold water. When Jamie Dimon of JP Morgan and others pay back each and every dollar of US Government guaranteed debt they are using to run up commodities and the such, then they have some moral ground to say no to Obama and the Financial Tax. Till then they should put up and shut up.

The very idea that I am hearing about how the repo market would be effected has no bearing here. The biggest reason why the system collapsed was the inherent leverage that the financial system had taken on via the shadow banking system. Most of this leverage came from the fact that the repo market was completely out of control with regards to collateral. My first job on Wall Street was on a repo desk. It used to be that only Treasuries were used to finance trading positions. When CDO's and other nefarious securities started to be used, all hell broke lose. Investors lost confidence in each other with regards to financing. This is what brought down both Lehman and Bear Stearn's. The inability to properly fund day to day operations and to properly manage duration gaps in overnight funding.

I have always said that reforming the repo market would get us half way out of this mess. I stand by that statement.

Also. I found this piece in Business Week very disturbing and puzzling.

http://www.businessweek.com/magazine/content/10_05/b4165010350026.htm

The Prince goes on to say that taxing the banks is wrong. OK. But why is it then feasible to tax the American Public to balance the $1.4T deficit? The reason we have a deficit is partly because of the banks, and the simple rationalizing by the Prince is just mind boggling and an outright affirmation of looting by Wall Street.

But back to the strategic default question. The New York Times ran this story a while back.

http://www.nytimes.com/2010/01/10/magazine/10FOB-wwln-t.html?em

Again. It’s extremely disingenuous for anyone in the banking industry to pass judgment or offer advice on this subject. Trillions of Tax Payer dollars have been showered on the banking sector only in an attempt to revive old bubbles. Other then HAMP, which is a scam and a fee bonanza for Mortgage Servicers and Banks, has there been one single program to keep Americans in their homes? Every single tax payer backed government program has been enacted to re-liquefy the Wall Street bonus machine. That's all it is. Geithner, Bernanke, Summers, and the 40 Thieves (Congress) have enabled Wall Street to utterly loot America. The lobbyists run the joint backed by corporations that basically use Congress as a paid subsidiary. Lobbyists funded by the banks want to make it a moral question when it comes to walking away from an underwater mortgage. Again, the ones that make the laws and regulations tell the rest of us what is right or wrong.

Bottom line. It’s not a moral question. It’s a smart financial question. Its flat out financially stupid to keep paying a mortgage that is substantially below water. I am not alerting anyone to do so. Please speak to a lawyer and or accountant to find out what the rules are in your state. But don't be suckered into thinking it’s a moral question or dilemma. Especially when it’s the crooks that are telling you so. I currently have a 30 year fixed rate mortgage at 6% on a home I bought in late 2006. I also have roughly 50% equity in my home, my home is located in central New Jersey, obviously prices (5-10%) have dropped, but not as bad as other places. In this case I will continue to pay. Not because it’s a moral question, but a smart financial one. I also have a very high credit score that I would like to protect. All in all I could care less what my parents think of me let alone my next door neighbor. I do what’s in the best interest of DE LA SOL (Me-Myself-I). If I HAD very little equity in my home, and was paying my hard earned money towards a significantly under water mortgage. I personally would speak to a lawyer and walk away. Just like Morgan Stanley did.

http://tradersutra.blogspot.com/2009/12/if-morgan-stanley-can-walk-away.html

Just this morning.

Tishman Speyer walked away from Peter Cooper Village.

http://www.huffingtonpost.com/2010/01/08/tishman-speyer-blackrock-_n_416687.html

When did people in society start to act responsibly for the economic effects of their own actions? Do the hedge funds act this way? How about energy speculators? Enron Traders? As soon as a bank underwrites a mortgage, they package it and sell it to someone else. So the idea of an enduring relationship between you and your bank is meaningless and transparent. Bankruptcy is part of America. Just ask the Airlines. Why is it OK for Donald Trump? The Banks lose their higher ground when they immediately mail out credit card applications to people who have already filed for bankruptcy, knowing that that they can’t re-file again for 7 years. Banks like to say that you are escaping your responsibility when walking away from your home, but if homeowners don't pay, the bank just repossess the home. You are not escaping consequence, just suffering the effects of them.

So the moral thing to do for most homeowners is to default on loans when it is in their financial best interests to do so. Economic self interest and formal legal frameworks are simply insufficient to regulate a just society. What is moral is something we all collectively decide. The ones in power that routinely demands heroic sacrifice of people in the name of virtue will always fail. Clever hypocrites (People in Power) will be rewarded while naive saints (US) pay, and the overall framework of society will thus not be virtuous at all.

The banks again lost the moral argument when they started to let loan standards slip. When they started to pay out cash commissions at the signing of the mortgage. When they used predatory lending practices take over the origination process. Once we got to that point it was a matter of time before bad loans would be made. Well know we have trillions in bad mortgage paper. The banks now want homeowners to behave morally, when they never acted morally in the first place. It’s time that homeowners act more like bankers.