Give Me the Good Old Days of the Bailey Building and Loan
Now that I (as a taxpayer) own most of Fannie Mae, Freddie Mac, American International Group, a few auto companies, and God knows what else (do we own any MI companies?), I'm starting to feel a bit nostalgic for the good old days of the savings and loan industry.
For those of you who aren't familiar with S&Ls, I suggest that you run out and rent a copy of that Christmas time movie, "It's a Wonderful Life" starring Jimmy Stewart and Donna Reed. Or you can buy for about 99 cents on eBay "Inside Job: The Looting of America's Savings and Loans," a book I penned back in 1989 with my co-authors Stephen Pizzo and Mary Fricker.
"Inside Job" gives you a thumbnail sketch of how S&Ls used to work and what went wrong when President Reagan and a very willing Congress decided to deregulate this once-sleepy little industry that formerly did one thing and one thing only: originated home mortgages and kept most of them in-house on their balance sheet. (Memo to all politicians: How come every time you deregulate something it looks brilliant for a year and then it blows up into a costly debacle?)
The current credit crisis was sparked by Wall Street carelessly financing nonbank subprime lenders, securitizing $2.6 trillion in A- to D (and alt-A) loans over a four-year period, and then throwing gasoline on that fire by mixing in such wild and whacky inventions as credit default swaps, collateralized debt obligations, the ABX index, and other stuff that is so complicated that you need to be a Ph.D. in physics or calculus to truly understand it. (Memo: If you work in a casino you probably understand all this. So, I'd like to apologize to all the blackjack dealers out there.)
Anyway, I've been on this rant before. We all know what happened. (Read "Chain of Blame," that other book I wrote.) In short, I've invested thousands of hours thinking about this mess, writing about it, reporting on it, and wondering this: How the hell did this really happen to us? The short answers: Alan Greenspan, lack of state and federal regulation, stupidity, and here's the big one: human greed. We're human. When we want something (money) we find a way to get it by any means necessary. We shoot first and ask questions later. We make crazy mortgages to underqualified applicants and rationalize it the name of profits and homeownership rates. We rationalize. A lot.
OK, that's the easy part. But here's a deep structural business question and I want all of you to think about it carefully: Would the mortgage finance system in America be better off if we, once again, had thousands upon thousands of community savings and loans whose mission in life is to collect deposits and invest those liabilities in home mortgages and then keep the loans in-house on their balance sheet? (It sounds a bit like communism, doesn't it?)
Yes, I know the argument against it: you can't borrow short and lend long. Yes, there's an inherent mismatch between short-term deposits and 30-year fixed-rate mortgages. Yeah, so what? Have the thrifts makes ARMs. Have them match their asset and liabilities using hedging instruments. (This would give those Ph.D.s on Wall Street something to do.)
I'm fishing here, I know. But most FRMs have an average life of seven to eight years. Can holding mortgages against short-term deposits be all that risky? Given the $4 trillion (or so) that the government has pumped into the credit and mortgage markets, maybe we should ponder going back to the past. There could still be a role for Fannie Mae and Freddie, too, but I'll talk more about those two in next month's column. Meanwhile, I have to run to the bank. I'm going to stand in line and take money out using a human teller. Just to see how it feels.