Let Risk-Taking Financial Institutions Fail!
Monday, Sep. 29, 2008
By Ari J. Officer and Lawrence H. Officer
The Administration and Congress has felt compelled to do something about the "financial meltdown," so an inefficient and inequitable "bailout plan" has been rushed through the legislature, despite harsh criticism from the right and left. That's unfortunate. Both presidential candidates were stalling by qualifying the plan. Whichever candidate would have had the courage to reject outright this proposal would have the better claim to be President.
Do not be fooled. The $700 billion (ultimately $1 trillion or more) bailout is not predominantly for mortgages and homeowners. Instead, the bailout is for mortgage-backed securities. In fact, some versions of these instruments are imaginary derivatives. These claims overlap on the same types of mortgages. Many financial institutions wrote claims over the same mortgages, and these are the majority of claims that have "gone bad."
At this point, such claims have no bearing on the mortgage or housing crisis; they have bearing only on the holders of these securities themselves. These are ridiculously risky claims with little value for society. Consider the following analogy: It is as if many financial institutions sold "earthquake insurance" on the same house. When the quake hits, all these claims become close to worthless-but the claims are simply bets disconnected from reality.
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