Nutty Bankers, Wacky Congress

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I’ve always loved bankers. As a group, they’re smart, engaging and interested in business and the economy. But I really love them for their entertainment value; every few years you can count on them to do something truly nutty.


The latest example, of course, is the subprime meltdown.


So say you’re a subprime mortgage lender and you’ve got a potential customer sitting in front of you. You look over his documents and see he barely has enough income to pay the mortgage he wants to take out, his job status is shaky and he hasn’t exactly been fastidious about making loan payments in the past. Oh, and then there’s the issue of his down payment. There isn’t one.


What do you say? Lots of subprime lenders, at least until a few weeks ago, said something like this: “Sure, Mr. Jones. We’ll fix you right up. We’ve got a nice little loan package here that doesn’t require a down payment, and you don’t need to fill out a lot of those pesky loan documents. Best of all, it has a nice, low introductory interest rate that’ll keep your monthly payments down for months.” You know, of course, that when that low teaser rate expires in a few months or a year or whenever, his monthly payment probably will be unaffordable.


Now that’s nutty enough. But what may be even more so is that big lenders ones with recognizable names were bankrolling many of the subprime lenders by buying their subprime loans. If you asked them about the risks they were taking on, many of them, at least until a few weeks ago, said they had little risk. Why? Because if they bought mortgages that defaulted, they could force the subprime lenders to buy them back. “I’ve got a guarantee,” they said.


Problem is, when the whole industry tanks, nobody’s got enough money to buy back many loans. Maybe those bankers can re-read their worthless guarantees when they’re standing in line at bankruptcy court with the rest of the losers, waiting for their pennies on the dollar.


Every few years bankers go through a routine in which they rush into a hot market and overlend and seem surprised when they get stuck with worthless guarantees.


Twenty years ago I helped cover the collapse of a big real estate enterprise in which the operators, who were brothers well-known in local society circles, had gone around to a lot of local banks and taken out big loans, giving guarantees that they personally would repay the loans if their business couldn’t. When the real estate enterprise went glub, the brothers’ fortunes went with it, and the surprised bankers glumly trudged off to bankruptcy court, holding their worthless personal guarantees, and took their place in line to await their pennies.


The knuckleheads never seem to learn. Did they not read about the S & L; crisis? It was in all the papers.


Maybe the only people predictably wackier than bankers are the grandstanders in Congress. We can count on them now to wade in and “fix” the problem of subprime lenders. You know they’ll dream up some legislation with a couple of senators’ names on it. It’ll have all manner of onerous rules that will fall hardest on the surviving subprime lenders the ones who were doing things right or mostly right all along. The legislation will usher along disastrous unintended consequences. Think McCain-Feingold or Sarbanes-Oxley.


It gives those of us in business journalism plenty to write about for years. Yep, I love those nutty bankers. And that wacky Congress, too.



Charles Crumpley is editor of the Business Journal. He can be reached at

[email protected]

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