Monday, July 28, 2008

Housing bubbles

At a visceral level, it is deeply upsetting when institutions that once reaped fabulous profits (a goodly share of which were snared by their executives) are granted the protection of Uncle Sam. Robert Rodriguez, the C.E.O. of First Pacific Advisors (which has a fund I’m invested in), confessed to a “sickening” feeling at the news that the Treasury might guarantee the debts of Fannie and Freddie. Rodriguez was one of the few fixed-income investors who, having noticed the bloated balance sheets of the mortgage giants, refused to buy their debt securities. Ordinarily, less prudent investors would have suffered a loss; instead, any pain will be borne by the taxpayers.

More troubling than the unfairness is the potential that the solutions will exacerbate moral hazard: that people who feel inoculated will run greater risks. As Rodriguez observed: “Nobody wants to take the pain for excesses. Each time the problem gets bigger.”

I love underwriting corporate profits with my salary. You should try it sometime.


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