Jack Hardcastle

This began as a comment on Adam’s blog, but when I realized it was too long to be fair to him, I splintered it off to stand on its own.

Let’s start by agreeing that the golden parachutes should be severed. You lead a company to failure so severely that the federal government must intervene, and your “severance package” just got invalidated. No $20 million lump for the ousted executives. I don’t particularly care if you signed a contract a decade ago, and you feel this is what you’re entitled to. You failed both in your responsibilities to your shareholders, and in your responsibility as a mover and a shaker in the global financial markets. You nuke our markets and you’re lucky to avoid jailtime; don’t give them big fat checks.

I think Adam’s blame for the origins of the crisis (which John Steele Gordon says is thankfully a financial crisis, not an economic one) is misplaced. The people who took out those subprime loans in the first place (e.g. the “poor homeowners”) should have rented their homes rather than bought them. Many could not afford the mortgage with a traditional fixed rate loan, so they turned to the subprime lenders instead. Of course, since they couldn’t afford the payments to begin with, they eventually defaulted (at unbelievably high rates) causing ripples throughout the rest of the financial world.

If you follow the default all the way up the chain then eventually you get to the investment banks and A.I.G. The I-banks dealt in bad securities which the ratings agencies gave high scores even though they didn’t fully understand them. They did so because insurance companies (what’s that I in A.I.G?) agreed to back them as well, so all of a sudden these sure-to-fail mortgages are AAA-rated, bonded securities. Oops!

You know what I don’t hear enough of? How many people would have been kicked out of their homes if these companies weren’t nationalized? If you take out a mortgage for a home you are unable to afford, I think you should get kicked back onto your rear, having learned a lesson. Pack up your stuff, and move back into an apartment where you belong. If Paulson (because honestly, there’s nobody else with both the desire and the power to step up and do it) were to walk through Fannie Mae and Freddie Mac with a machete, chopping away bad debt like cutting back rotting vegetation in the forest, what happens to the borrowers, and what happens to the rest of the institution? The home owner suffers, and the organization recovers, right? What am I missing?