Friday, February 15, 2008

Ethics: a Non-Issue in America


I find it curious that lying, fraud, sins of omission and misrepresentation play absolutely no part in the national debate on how best to "save" at-risk homeowners and lenders.


This is curious for a number of reasons. Certainly one is the high degree of religious conviction and belief Americans report to hold.

According to author Richard Bitner's website The Mortgage Insider, "Nearly three out of every four subprime mortgages originated by brokers were misleading or fraudulent." (Bitner's book Greed, Fraud & Ignorance: A Subprime Insider's Look at the Mortgage Collapse was recommended here this week.)

Never mind expecting calls that fraud should be pursued as a crime--how about expecting someone to simply voice that it was wrong?

As outlined in Bitner's excellent book, fraud and misrepresentation of risk was the game played by everyone from the anxious-to-get-rich-quick borrowers to the anxious-to-make-billions investment banks which packaged the risk under the phony guise of low-risk AAA ratings issued by a handful of powerful fraudsters, a.k.a. the ratings agencies.

Yet pundits and politicos are falling all over themselves in a frenzy to "save" the players large and small from any consequences of their fraud.

Since I am tired of waiting for some well-regarded pundit or politico to state the obvious, then I have to: everyone who committed fraud, omitted the truth or misrepresented the risks of a debt instrument committed a serious ethical breach (and a crime). Each person who did so deserves the consequences of their unethical conduct. They do not deserve to be "saved" by taxpayers.

I am not suggesting criminal charges, though those would be richly deserved by players large and small alike. I am simply suggesting that we as a nation should state that fraud is wrong and should not be rewarded. The market will deal out the consequences if we just don't intervene.

I want to reiterate a point made earlier this week in Greed, Fraud and Duplicity: How the Housing/Lending Bubble Inflated, which is fraud can be quantified by the dollar amount but the ethical lapse/moral bankruptcy is the same regardless of the fraud's dollar cost.

Thus, the person with no assets and modest income cheated on their subprime loan application. The Wall Street investment banker had the opportunity to cheat on a much larger scale--purposefully packaging high-risk debt into CDOs willfully misrepresented as"low-risk" AAA instruments--but the truth is, each player cheated and lied to gain wealth or credit which they would not have gained had the truth been told. In this way each player, rich and poor, are equivalently morally bankrupt.

Plenty of people refused to lie or misrepresent the truth, and of course they were unable to borrow vast sums of money or sell misbegotten CDOs for millions in profit. So why should honest people be punished by being taxed to save their willfully fraudulent fellows? Isn't this Completely Backward Justice? Shouldn't those who knowingly misrepresented the facts for their personal financial aggrandizement realise some consequences? Or is "do the crime, serve the time" only for petty drug criminals?

Again, what I find most curious is how a supposedly religious society which claims high ethical standards is concerned not with questions of lapsed ethics or condemnations of outright fraud but with a frenzied rush to shield the wrongdoers from any consequences of their actions.

I wonder if a complete cleaning-of-the-slate financial depression which wipes out trillions of dollars of wealth might eventually re-set the nation's broken moral compass.

I know the standard line is "oh, heck, lying and cheating for personal gain is just human behavior, and this bubble was no different." Nice, but should we then accept grand-scale moral bankruptcy as the "natural state" of this Union? Should we collectively sigh and dismiss it with, "Oh well, everybody cheats on their taxes." Actually, not everyone cheats on their taxes. So who is quickest to forgive the cheater? Another cheater, of course, for he/she has already excused his/her own moral bankruptcy.

As a counter to this "we accept human greed and ethical weakness as really OK because we're all equally morally bankrupt" I quote from Lincoln's Second Inaugural Address. Lincoln was referring to God's punishment for the sins of slavery:

"Yet, if God wills that it (the Civil War) continue until all the wealth piled by the bondsman's two hundred and fifty years of unrequited toil shall be sunk, and until every drop of blood drawn with the lash shall be paid by another drawn with the sword, as was said three thousand years ago, so still it must be said 'the judgments of the Lord are true and righteous altogether'. "

Financial fraud does not hold a candle to the immense sin of slavery, yet the principle--that perhaps this nation has earned the destruction of wealth that has just barely begun--is something worth pondering. Call it God's judgment or Karma with a capital K, but if you believe in a moral Universe then the unrestrained greed, corruption and fraud of the past seven years will have consequences no matter how many Americans scurry around excusing each other, begging to be saved from the consequences of their financial crimes and ethical bankruptcy.

Please note I am not calling for or hoping for Financial Armageddon. I am simply positing that the consequences of systemic fraud may well play out regardless of the machinations underway to "protect" and "save" those who lied and misrepresented.

In non-moral terms, the obvious consequence is a loss of trust in institutions such as credit agencies and eventually in the entire U.S. credit/financial structure. To restore that trust requires invoking something analogous to ethics, even if you prefer to call it some other word.

"Trust, but verify" was the operative phrase of the Reagan years. How can a buyer of a CDO or credit-swap derivative based on hundreds of loans which are riddled with fraud and misrepresentation from the application on up to the credit rating "verifiy" the AAA-rating of the risk they are about to purchase? They cannot. Read these two books and you'll understand just how bankrupt the entire system truly is:

Fiasco: The Inside Story of a Wall Street Trader

Greed, Fraud & Ignorance: A Subprime Insider's Look at the Mortgage Collapse






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