[Lance B]

Since I started this thread, allow me to express my opinion. Lance and Rick are both talking about 2 separate things. Let to try to explain in my poor way...

I am actually glad that you have decided to weigh in and put a 3rd party moderators view to it all as I do believe that no matter what I say, and maybe whatever Rick says, that it gets caught up in the trying to score points on any minor side issue which deflects from the main points. I am therefore glad that you brought it back to it's maan elements.

1) Lance's main point revolves around a concept called "duty of care" by a lender to a borrower. It is actually one of the main tenets of lending (for those who have studied this, it follows the "know your borrower" rule). It is a quaint, old fashioned concept that seems to have been forgotten in recent times. The basic point is the financial institution lending the money has a basic duty to make sure the loan is not used for an imprudent purpose and is structured in a conservative way so as to not cause grief to the borrower.

This is very much part of my argument(but not all) and I am glad that you recognised it. "Know your borrower" was very much one of the tenets of the banking system and *not all that long ago*, I might add. The bank would know the employment history *and* their income due to the fact that the bank was where you deposited your income cheques and thus built up a history over time. You were required to build up a history in order to get *any* loan. This is part of the reason *why* we had a banking system the way it was and there weren't these cowboy lending institutions driven by anonymity and greed.

Duty of care is not about a nanny state or treating people like children. It presumes the lender is willing to educate and be prudent. The borrower in turn is presumed to be rationale and an adult.

My points exactly. I never invisaged a nanny state nor treating people like children and I don't see why Rick thought that if we give an inch that we have to allow the government to take a mile. It seems that in order to get his point across Rick resorted to an either an "all or none" scenario and I never suggested such a thing.

The laws that could be implemented would make *sure* that the borrowers income was actually what was stated on the application. Laws could also be implemented that would see the funds are automatically taken from their accounts to keep up with each monthly payment. This would have *no* impact on what or how Rick invests his money and he would be free to invest in whatever he wanted.

So what went wrong? As Grant has pointed out human nature got in the way. Simply put greed overwhelmed common sense. [If some stranger offers to sell you half a dozen new FA200 macros for $50 each your common sense quickly overcomes the initial pulse of greed, right?].

*Some* people's greed, yes. (although no Canon owners wouldn't go for it. )

Back to my point. There was greed from both the financial institutions and the people taking out mortgages. Risk was completely ignored. But it wasn't just the U.S. There was all sorts of financial craziness going on all over the world. Examples of financial dodginess are surfacing everywhere from Australia to Europe. Subprime was simply a catalyst that set of a chain of catastrophes worldwide.

Australia is largely not part of this meltdown as our lending laws are more strict. As you say, there have been mortgagee sales in Australia, but they are nowhere in anyones wildest dreams like the amounts that have occured in the USA due to these dodgy loans. As you also say, it is due to rising interest rates which are a result of the US prime mortgage fallout that some of the Australian mortgages fell over, not due to the overzealous lending/borrowings.

The underlying fact is, that if there were tighter controls much of this wouldn't happen. Greed on both sides was rampant and the people who took out the mortgages were also guilty of greed and fraud, just that it was the lender who should to take more responsibility as *they have the power* to do so by properly *checking* the incomes stated by the potential borrower rather than quicky sign them up in their *fervour* to get their fat commission cheques. If the lender doesn't lend then the deal can't be done. As I said, a simple law which cross checks the incomes stated and checking credit history would go a long way to avoiding much of this problem.

I am sympathetic to many hard working people who didn't participate in this but have been caught in the ensuing financial maelstrom. It is quite sad to read some of their stories.

This is a very important aspect that does seem to elude many. This is a cost worn by all, especially those in the US, but will be borne be much of the industrialised world.

2) One of Rick's main points talks to the concept of "moral hazard". Wall Street paid itself $100 billion in bonuses (on top of salary) over the last decade (yes, billion$). Investment bankers outside the U.S. also got billions & billions in bonuses. These people aren't going to pay the money back, ever. But the losses caused by their financial recklessness are being capped through the actions of central banks & governments worldwide (ie. ultimately, the hardworking taxpayer). As for the people who took on excessive risk and poorly structured mortgages, betting on ever rising housing prices, well the government is now taking steps to help them out too.

So here we have a living example of moral hazard. When ultimately the taxpayer/government mitigates losses to both financial institutions and mortgagees. However both the institutions and homeowners would have gotten to keep all the financial upside if their risky bets paid off! Yuck. If you think this is more like Dukes of Hazzard, you are not alone.

As I kept saying to Rick, this could largely been avoided if there were a few laws put in place to stop the greedy lenders from lending to anyone just so as they could get their fat commissions. It was the greed of the lenders looking to get their commissions that resulted in them paying themselves the $100billion that you talk about. Who foots the bill? The US tax payer and the rest of the world.

I am *not* of the opinion that we should be nannying anyone, but when it comes to people being duped(either by lender or borrower) en masse which ultimately affects the rest of us, then yes, the government needs to put in checks and balances to avoid this from occuring.

As you rightly point out, the US government will be subsidising some of this through taxes in order to prop these institutions and hopefully avoid a recession up in a forlorn hope of avoiding a major catastrophe. But in the end, the US tax payers have to foot the bill. Is this not also nannying people, the state will look after you mentality?

3) Last point. Items 1 & 2 refer to the abundance of moral turptitude that has surfaced. It is not illegal however.

Both Lance and Rick have talked about fraudulent activity. This, in my mind, is kind of a separate issue from the first 2 items. I don't think either of you are sympathetic to the lender or the borrower if they engaged in illegal behavior.

You're damned right there.

There seems to be quite a bit of fraud from both sides of the ledger, but as I stated before, it is really up to the lender to make sure that the information that they get from the borrower is correct and not fraudulent. These lenders were remiss in their duty and in their fervour to sign these people up in order to obtain their fat commissions. At the end of the day, it is the *lender* who has the power to approve these loans, so it is up to the lender to make sure that they get the correct information and therefore there should be laws put in place to assist them with getting the correct information. These lenders couldn't care if they could pay or not as they would get their commissions regardless and so bugger the rest of us. As it stands, I think it is criminal the way these lenders behaved in their fervour to get their fat commissions.

[Rick]

1) Lance's main point revolves around a concept called "duty of care" by a lender to a borrower. It is actually one of the main tenets of lending (for those who have studied this, it follows the "know your borrower" rule). It is a quaint, old fashioned concept that seems to have been forgotten in recent times. The basic point is the financial institution lending the money has a basic duty to make sure the loan is not used for an imprudent purpose and is structured in a conservative way so as to not cause grief to the borrower.

Duty of care is not about a nanny state or treating people like children. It presumes the lender is willing to educate and be prudent. The borrower in turn is presumed to be rationale and an adult.

Hi George:

I don't consider regulation a nanny state. What I do consider a nanny state is the endeavor to pass a rule to guard against every possibility of harm. And to keep laying them on and removing more personal freedom when the ones before aren't satisfying the unwashed masses.

Check your last sentence ""The borrower in turn is presumed to be rationale and an adult". The wild dogs wanting to savage the lenders as though this is overwhelmingly their fault and the borrowers are mere dupes go to considerable lengths to ignore this.

The majority of the focus on this subject since things started coming apart has been on the lenders. And they should be under scrutiny and aggressively dealt with under either criminal or regulatory law when there is justification for that.

But where's the focus on the borrowers? Fraud protection agencies - probably similar to businesses you encounter in your profession - are finding rates of 50% and higher falsified mortgage applications when looking at these failed mortgages. Where are the screeching harpies in the press and and general public who want the heads of the lenders when it comes to the often criminal activities of these borrowers?

It just isn't happening George. Much of this amounts to bank and wire fraud in the US, and yet the FBI has pretty much publicly stated that they are not going to go after borrowers unless the amount was large or their were multiple frauds. When do you ever solve a problem by dealing with only part of it?

And like much of our criminal justice system in life, there is no personal accountability expected of these people. We go to court these days and hear the criminal had a terrible upbringing, didn't do well in school, has "issues", etc. No, it's not their fault; they were misguided, misunderstood, unloved, incompetent, sub normal intelligence, duped by others, etc. And so we give them a little pat on the head and ask them to please try not to do it again. Care to guess what the recidivism rates are these days? In this case we have borrowers who were at least as equally to blame as the lenders, whether guilty of mere poor judgement or actual criminal offences.

And yet... we persist in this fuzzy logic attitude that they were "duped" - smart enough anticipate what would be required and lie accordingly on a mortgage application, but apparently not smart enough to understand the application they signed. Both the media and government focus is on the lenders, and the borrowers are pretty much sliding under the legal radar and getting a pass. Not to mention, it appears, a helping hand from the taxpayer as a further reward for their behavior.

No personal responsibility and criminal accountability required. Ignoring everything else for the moment, what kind of message does that send regarding the consumer's relationship with the financial system?

It gets better as you go along. A recent article in a criminology journal pointed out that when a person in the business of money committed a fraud in the US, their sentences were ridiculously high compared to sentences handed out for consumer fraud. Obviously, there's a higher level of trust at the professional level and sentences should reflect that. But twenty years against an average sentence of 15 months for the consumer who commits a fraud is proportional? That's ridiculous.

One of Rick's main points talks to the concept of "moral hazard". Wall Street paid itself $100 billion in bonuses (on top of salary) over the last decade (yes, billion$). Investment bankers outside the U.S. also got billions & billions in bonuses. These people aren't going to pay the money back, ever.

The people who ultimately shelled out those ridiculous bonuses - there and in so many other boardrooms unrelated to the current topic - were the shareholders of those companies.

So... will those shareholders rise up in arms if one of these corporate squeegee kids is appointed to a position in their company? Will they put an end to this kind of corporate piggery? Well, I'll be very surprised if they do.

Are they immoral as hell? Oh yeah, I think so. But they're being paid with the money of the people who ultimately employ them. They aren't canning them, they aren't refusing to reimburse in that fashion any longer, and they aren't abandoning those companies in droves and taking their money elsewhere. I know this isn't exactly your point, but if shareholders don't hold them accountable, what business is it of government to step in and do what those willingly paying them those wages won't do?

Law enforcement ALWAYS gets into trouble when it gets into the morality business, whether dealing with gambling or white collar issues. The end result is usually worse than what was there before.

As for the people who took on excessive risk and poorly structured mortgages, betting on ever rising housing prices, well the government is now taking steps to help them out too.

Exactly. And why? Oh right... they were duped victims.

I can wholeheartedly support helping out any borrower who the balance of probabilities shows was lied to, coerced, defrauded, lured, steered, or in any other manner victimized by lenders.

But at the same time, it looks like we're also going to helpfully support the efforts - often criminal - of those who falsified mortgage applications, were flipping houses, etc.

And why? Because we have this insane populist approach that they were all misguided, low intelligence lambs who were led to the slaughter and respond with a blanket approach (at least that's what it seems is going to happen) to bail them ALL out - the criminals as well as the genuine victims.

No personal responsibility will come out of this. No lessons will be learned. No examples will be set for those who contemplate this in the future - for the vast majority of borrowers, there is very little in the way of consequences out of this.

I would feel far better about this whole thing if enforcement went after those on both the borrowing and lending side of this debacle with equal enthusiasm. Hell, just spend one tenth of what is spent on drug enforcement, I'd settle for that. And your conviction rate would be one hell of a lot higher. But we know that isn't what is happening and isn't what is going to happen. The majority of enforcement efforts have been directed by the government towards the lending side, and the FBI has pretty much said they're not going to go after the small borrowers unless it involved multiple loans.

Again, what kind of message is in there - either from a moral standpoint or as a deterrent to future financial fraud by consumers?

And ultimately, this one sided view of the situation spills over into demands for "more laws". Hell, we already have laws against criminal activity on both sides of the borrower/lender equation. In the US the government is on the whole said that it isn't going to look at criminal borrowers too closely.

Is the hue and cry isn't about that decision. Oh no! Rather, it's that we need even more laws prohibiting one more aspect of personal choice and liberty, as though we're managing the affairs of children. The words say "the PURSUIT of happiness" - not a guarantee from the government that you will be protected from the consequences of your decisions in that pursuit.

This mentality ignores outstanding criminal acts by an enormous number of people and the fact those offences are not being prosecuted by the government - and instead demands more prohibitions. It speaks volumes of the mindset of these people that in their world it never occurs to them that the first and biggest complaint should be about the decision to do minimal enforcement action dealing with borrowers and concentrate instead on lenders. Lenders are the root of the problem and prohibitions must be placed on these people in how they lend their money. God forbid we not only start enforcing what we've got and simply jail both lenders who break the rules and borrowers who submit fraudulent loan applications - or at least go after fraudulent borrowers equally as enthusiastically as we're examing the lending side.

I don't suppose that the fact there's a lot more votes out there to be had from borrowers and their sympathetic families than from lenders and their friends had anything to do with that policy decision.

Start examining every failed loan application and jailing the guy's ass who submitted it for committing an already existing offence if it's fraudulent. See how many bad loans go out once people start telling the truth on loan applications before you start prohibiting how people invest their money. It is irrational to try and prevent offences by making somebody ELSE responsible for what the guy potentially commiting the offense is doing. Why should I as a lender have to go to lengths to verify the borrower is telling the truth rather than holding HIM responsible for what he submitted? That's just one more act of making somebody else responsible for that the individual applying for the loan should be responsible for. Your mommy and daddy take responsibility for you and your actions when you're a child. Once you're an adult, nobody else should be held accountable for decisions you make and personal information you swear is the truth.

3) Last point. Items 1 & 2 refer to the abundance of moral turptitude that has surfaced. It is not illegal however.

I don't think either of you are sympathetic to the lender or the borrower if they engaged in illegal behavior.

Exactly. It isn't illegal. But many talk about it as though it were - but mostly only where the lenders are concerned. Everybody else was a hapless dupe.

Coming from a law enforcement background, tolerance of criminal behavior isn't too likely to find a home with me - part of my problem with the current one sided yipping about who did what to who. I'm also unlikely to excuse an entire class of criminals by accepting the excuse that the poor dears were simply to naive to know what they were doing when they submitted fraudulent mortgage applications.

More to the point, like every peace officer does I swore an oath to enforce the law without fear or favour. Not chase one group of criminals around while turning a blind eye to the other class of criminals who were also committing crimes in the whole mess, and apparently in much greater numbers percentagwise. That is what is what is happening in this situation for a large number of reasons, many of which I can guess at and few of which are justifiable. I find that both repulsive and irrational, and nothing less than disgusting that the general public apparently thinks this is an acceptable response from the CJS to this.

And finally, at the end of it, the incessant calls for more regulations in this and every other field of human behavior is indeed a descent further into the nanny state, although where and how we control continues on as a shining example of hypocrisy. You cannot read Locke, the writings of The Framers, and the related constitutional documents from both England and the US from the time we set up our system of governance and see anything else over the last 30 years but an accelerated race into devolving both personal responsibility and personal freedom to the government. We are engaged in a race to the bottom and a statist existance. "If it saves just one life it's worth it" as a rational for making law is the biggest load of irrational tripe ever served up to people, and it speaks poorly of our intelligence that so many buy into that.

Some people find turning an increasing amount of their privacy and freedom to government fits their views on life perfectly. Perhaps some kinds of people have their lifestyle or beliefs affected more than others; I don't know. I do know that piling laws on more laws because you can't (or more often won't) enforce the laws you already have is the height of stupidity, illogical, expensive, deepens the layers of bureaucracy, decreases the efficiency of law enforcement, and ultimately results in just a bit more personal privacy and freedom being handed over to the government.

And for what? Apparently nothing if we look at the results.

Can you say "FINTRAC"? As you're apparently in the money business, I know you can, but most Canadians here will have no idea what I'm talking about. Oh yeah, organized crime and terrorism have ground to a halt since we drank that Kool-Aid.

I know that also wasn't the thrust of your post. But as you were addressing some of what I wrote, I felt that some of the issues involved in this that are being glossed over should be considered. The "just pass a law already" crowd doesn't get it and never will, probably because they can't get beyond the daily tabloid newspaper and the shallow tripe they serve up.

The observation that those who will give up their privacy and freedoms to government in exchange for promises of security will in the end have neither was never more true than it is today.

[tranq78]

Hi Grant!

Next time you come through this part of the world it will be my turn to pay for lunch!

There is an old saying in finance: "Bears will make money. Bulls will make money. But pigs always get slaughtered." Fear is fleeting but greed is eternal. Human nature.

Jason is correct. The problems aren't over yet. Real estate driven problems take much longer than a few months to work their way out.

I can't imagine having to pay 20%+ interest rates. Well actually I can. My parents owned a small business and really struggled when interest rates also hit that level. Although I was young, from their experience I developed an aversion to debt that I still have.

-G