I’ve noticed something intriguing about the debate regarding the Greek default/restructuring/bailout: There is a familiar odor to the “Blame the profligate Greeks” meme now circulating. It is little more than a brilliant marketing ploy. This distraction ignores the simple reality that lending to insolvent people, institutions and countries is first and foremost the fault of the lenders.
Let us start first with the Greeks, who lied their way into the EU (with the help Goldman Sach’s financial engineers). The ridiculous pay and vacation structure, the absurdly generous pension plan, the excessive spending by Athens. They are a nation that can honestly be described as tax scofflaws. Yes, Greece is a mess.
Which begs the question: WHO WOULD LEND A DIME TO THESE PEOPLE?
None of these factors were well-hidden. Everything about Greece is well known to any casual visitor, from its Welfare state to its deficits. Even the shenanigans Greece went through to join the Union European were not unknown. Rather than confront their obvious lack of qualifications, the EU turned a blind eye to it, in order to form their more perfect union.
Which brings us back to the lenders. What is their role, if not to exercise expert judgment? If they cannot independently determine who is credit worthy and who is not, than why do they even exist at all? We might as well leave piles of money around and ask borrowers to self-regulate their appropriate credit limits.
Back to that “familiar odor.” There was a meme attempted during the US housing collapse to place the blame upon the home buyers and borrowers who exercised poor judgment and got in over their heads. It manifested itself in numerous ways. It was an intellectual failure, for the simple reason that it is the lenders job to assign credit, to determine who has the ability to service the debt and who is a bad risk. Indeed, lenders have legal and fiduciary duties to their shareholders, capital sources and regulators. Eejit home buyers who went wild during the era of free money have no such obligations.
Michael White, formerly of CountryWide’s Subprime Unit, had complained bitterly about the increased probability of defaults to his bosses when they decided to drop income verification in mortgage lending. “Eliminate the verification of income for a mortgage borrower, and you eliminate your ability to predict the likelihood of repayment or default” he told them, and was roundly ignored.
We need to better understand the term “Loan Origination Fraud,” when lenders willingly make bad loans, consequences be damned.
As we noted yesterday, bailouts go to the incompetent bankers. Whether bankers are foolishly giving credit to home buyers (and ignoring their lack of incomes), or making loans to Greece (and ignoring their broken financial structures), it is the LENDERS who are making these awful decisions. The LENDERS should be forced to suffer the consequences of their own incompetence and not the taxpayers.
And that means defaults, rather than bailouts . . .
This post originally appeared at The Big Picture and is reproduced here with permission.