I thought about this article often this week as we continue to suffer the beginnings of the national hangover we have as a result of three bubbles in a row—internet/technology, then housing, then credit—and I think of John Perry’s article about the end of entitlement. What madness, and with what terrible consequences.

I pray for mercy, and I pray for redemption.

[Mark] Furlong joined M&I in 2001 and moved up the executive ranks until he replaced Kuester as CEO in 2007 and as chairman last year.

“In Japan a guy would have committed hara-kiri,” said Tom Weggel, 69, a retired printer and maintenance man who saw the value of his M&I stock plummet by more than 80%. “Here they get rewarded.”

This jumped out at me because there have been so many discussions about the ethics of a homeowner walking away from a mortgage that is under water. Particularly in a free market setting, no CEO who oversaw this sort of fiasco is entitled to a golden parachute and even if he or she has no compunction about accepting one, the corporation involved should refrain from offering it.

All too often, the level of personal ethics and assumption of responsibility for failure seem to be inversely related to the scale of the business involved. If “too big to fail” is wrong, then “too high up the corporate ladder to pay the consequences” should be equally unacceptable.

Of those to whom much is given, much will be expected.

It is a good observation Jeremy.  One of the truly frustrating parts of all this is that free market capitalism as properly envisaged involves risk and reward.  But we have had a tails I win heads you lose situation for too many corporate leaders for too long.  One has to ask so many questions about those involved in corporate governance among so many things.

I know I probably should not be like this, but I have trouble having any sympathy for people who take out over a half million dollar loan for property in a desert. There is no desert house in the world worth that kind of money.

There is quite bluntly no non-disruptive way to resolve present debt burdens. And, as I have said for some time, we are beyond the point of collective solutions.

You can count on politicians NOT to deal with their portion of total debt. No matter, as the federal “debt limit” is not set by Congress; it is set by the markets. At some point people will no longer lend money to the US government at anything like current interest rates. When interest rates eventually rise, and they will—probably quite a lot—the burden on families, businesses, and governments will become unbearable.

Every balance-sheet correction has come to be called a Depression, and this one is no exception. Because initial debt levels are so high this time around the adjustments are likely to be wrenching, particularly with world monetary systems as badly broken as they are.

We’re in the early innings of this one, people.

Jeremy, perhaps the new penultimate example of chutzpah is the President of the Mortgage Bankers Association decrying the moral hazard of helping homeowners in distress, soon followed by the MBA short-selling its headquarters, sticking the lender with a $30 mil loss!

Estimates are that @60% of the securitized loans were never transferred into the intended trusts. It is now illegal to do so under NY/DE trust law that governs virtually all the trusts and under the Internal Revenue Code for REMICs. IRS now investigating per Reuters; penalty is 100%! 

You don’t even want to hear of the millions of willful legal violations in foreclosures. One example (albeit non-foreclosure): reconveying a mortgage for a sale require three documents signed by Chase VP Marsha Craine, two notarized by the same notary. All three /s/ radically different. Perjury, anybody? By the way, the sellers, whose mortgage was being reconveyed? The Obamas! (I love showing people the docs.)

What is profoundly disappointing is the lenders’ failure to participate in 2008’s Hope for Homeowners short refi program. It would have netted lenders more than forclosures or short sales and avoided foreclosures for hundreds of thousands of homeowners. But lenders refused to participate.

Ominously, Chase’s CEO, Jamie Dimon, just predicted that foreclosures will increase (and prices fall) for another 12-18 months. Georgetown law professor Adam Levitin may have pinpointed the real culprit in his recent 60p article outlining the built-in conflicts of interest that cause servicers to foreclose even when against the interest of the investor.

The one bright spot I have seen recently is an increased willingness to lower principal to market value in loan mods. This follows 16 of the biggest banks entering into consent decrees with the Federal Reserve in April. Stemming the tide of foreclosures in the necessary prerequisite to stabilizing real estate prices and -perhaps- the resst of the economy.

“Golden parachutes” and executive compensation do seem wrong. How
can they be rewarded for crippling or destroying their own company ?
As an engineer, I was told that my pay raises were tied to my
annual performance. So, why is executive compensation so
decoupled from any notion of performance ? The unholy grail for
executives seems to be that their power and compensation must be
entirely severed from any notion of responsibility.
  Did the CEO who received the $24 million golden parachute, a Mr.
Furlong by name, go the extra mile (or furlong) to engineer the
downfall of M&I so that it could be picked up cheaply by BMO
Harris Corp, of which he is now CEO ? If M&I became a trainwreck
on his watch, why is he being rewarded ? This is very odd indeed.
I don’t recall being rewarded for my bad decisions.

Stop pointing this out Jeremy and IchabodK. Just accept that in America some get to make their own rules.
The rest of us get to vote for the candidates they fund.

Which thankfully I don’t; there are some advantages to be a green card holder.

As an outsider, I don’t understand the moral disapproval often directed at US homeowners who give the keys back to the bank and walk away. The banks knew these loans were non-recourse when they made them, didn’t they?

Every commercial contract involves allocation of risk. Business people contract on this basis all the time. If the loan was non-recourse then the risk of a drop in property values rested with the bank, and the bank knew it. There is nothing immoral about walking away, because the homeowner did not promise to repay the loan at any cost, but to repay the loan up until the point at which it became uneconomic to do so.

We don’t have non-recourse loans in my country (Australia), and at the moment everything is going swimmingly. But if things go bad, we may wish we did have them. In some ways, its a social safety valve.

RE: “If the loan was non-recourse then the risk of a drop in property values rested with the bank, and the bank knew it. There is nothing immoral about walking away, because the homeowner did not promise to repay the loan at any cost, but to repay the loan up until the point at which it became uneconomic to do so.”

I’m not certain what you mean by this.  The risk of a drop in property values does *not* rest with the bank, it rests with the owner who signed a contractual promise to purchase the property at the purchase price.  A freely entered into contract which now the owner is breaking.

Yes—the homeowner *does* promise to repay the loan at the cost to which he or she knowingly signed up for.

I might buy a car at the car lot—I do not have the right to go back in a year later and announce that I’m not purchasing the car any more because its value has declined.

Speaking personally, I try not to do business with people who back out of contracts—that sort of lack of integrity tells me how things will go in future.

Further, Dave Ramsey teaches something very similar.  If you are able to pay the bill, you should pay it.  If the bank *forces* you into bankruptcy, that’s another story.  But if you can pay it, you should, no matter whether the property has “lost value” or not.  After all, choosing to buy a house in the hopes that the value will go up means that morally you also have to take the risk of its going down as well.

Sarah,

Bear in mind, I am only talking about non-recourse loans. Someone has queried to me privately how many non-recourse residential loans there really are in the USA, which I can’t comment on. I am aware that there are only about a dozen states that provide for them.

But the comments I was referring to related to non-recourse loans, and where they are concerned I disagree with your point. A non-recourse loan is an agreement that the borrower’s loss is limited to the value of the property. If property values drop, that is a risk that the bank has agreed to shoulder. There is nothing immoral about the mortgage holder relying on that right which was written into the contract.