By Thomas G. Donlan
20 August 2007
Whom shall we blame for the so-called credit crunch? Casting about for scapegoats has never been easier, because the herd includes dozens of famous people, thousands of obscure but important financiers and millions of impecunious borrowers.
Not in any special order, we blame:
Alan Greenspan and George Bush. The "maestro" of the Federal Reserve pounded the monetary gas to get the country out of recession in 2001, the "compassionate conservative" president pounded tax cuts and allowed the Republican Congress to boost spending as if they were Democrats. Either stimulus might have been enough; together they were too much.
Bill Clinton and his housing promoters at the Department of Housing and Urban Affairs, Henry Cisneros and Andrew Cuomo. It takes a long time to get a housing boom started, just as it will take a long time to cut back the inventory of new condos and houses that is pushing the market down.
William R. Fair and Earl J. Isaac, who started the eponymous credit analysis company. Fair Isaac analytics are used in three out of four U.S. mortgage originations, and the company sells 10 billion credit scores a year. Though the company has reduced the effect of prejudice and allowed lending to move more quickly, it has turned credit from a character judgment into a commodity. Commoditized loans, in turn, are turned into commodity packages of loans.
The rating agencies, Standard & Poor's and Moody's, swallowed tonics compounded with financial alchemy that lead them to believe that over-collateralization could trump high leverage and poor quality in a package of loans. Or, if it was not an alchemical elixir, perhaps it was money. Issuers pay the rating agencies to bless their bits of paper.
Supposedly professional investors who rushed to put their funds' funds into Triple-A rated things they did not understand, ignoring the market's warning signal that risk premiums were nearly non-existent. Sometimes you get paid for buying junk, and sometimes you don't.
There's also room to blame predatory lenders and their phony appraisers and brokers. Their chief concern was that fees were paid up front.The worst of these made their living inducing old folks with free-and-clear homes to become speculators in real estate and credit. But the greatest blame attaches to people who borrowed imprudently, and who should have known better.
They are still around waiting to be fleeced again, to judge from the lower dregs of commerce.
An advertisement from "Lowermybills.com, an Experian Company" slipped through our office spam filter the other day. Headlined "Mortgage Rates Fall Again," it purported to offer a "$430,000 mortgage for under $1,299 a month," which seems to be a rate of 3.5% or less, depending on the amortization of principal, if any. It urged the would-be borrower, "Select your credit: Excellent, Good, Fair, Needs Improvement, Poor." We stopped following the lead when it asked for personal information. Experian, which likes to describe itself as "a global information solutions company," is not to be trifled with, since it runs one of the major credit-reporting bureaus.
People get this kind of junk mail all the time, but the odd thing was the corporate spokescreature: Instead of a gecko or a frog, the ad featured an animation of a little green alien, dancing what appeared to be the Macarena.
What were they trying to say, that Experian has investors on Mars who haven't heard about the problems with subprime mortgages?
In the snail-mail at our house the other day there appeared a come-on from an outfit called Crown Mortgage Corp., which may beat the little green alien.
"Start saving now with our 1.750% loan program," it said. "It's almost impossible not to qualify! And it's fast and easy."
No worries: "Borrow up to 100% of the value of your home and take cash out for any purpose. Use the cash for anything you want. Pay off high-interest debt or tax liens, take a vacation or finance your child's education. It's up to you."
Compared to companies like these, Countrywide Financial is as sound as the U.S. Treasury. Which may be true anyway.
Henry Kaufman, who used to be known as "Dr. Doom" back a few financial crises ago, weighed in last week with the all-too-accurate assessment that financiers redefined liquidity over the past couple of decades. Liquidity used to mean cash, or assets that certainly could be converted to cash with the stroke of a pen.
"Firms and households today often blur the distinction between liquidity and credit availability," Kaufman said. "When thinking about liquid assets, present and future, it is now commonplace to think in terms of access to liabilities."
Personal liquidity recently has been defined as what you can borrow with the stroke of a pen. An individual adds up all the limits on the credit cards in his wallet, permissible overdrafts on his checking account, margin-loan limits on his brokerage account and home-equity loan checks in his desk. Maxing them out, he may command two years' salary, or more if he had worked at it when lenders were bullish.
Corporate liquidity is not much different. Companies maintain credit lines that would have constituted the mark of Cain many years ago, confident that they can borrow their way through any crisis.
When a person or a corporate treasurer writes a check on air to achieve liquidity, he should think of Owen Glendower, the Welsh magician who tries to impress Henry Hotspur in an early scene of Shakespeare's Henry IV, Part I. Glendower brags that he can "call spirits from the vasty deep!" Hotspur gives him no credit: "Why, so can I; or so can any man. But will they come?"
What is shaking the markets is a refusal of the spirit of easy money to come from the vasty deep. We are undergoing an agonizing reappraisal of the power and security of credit.