Akkam’s Razor

A quote is absolutely driving me nuts is that of Countrywide CEO Angelo Mozilo stating that no one saw the current financial turmoil coming:

But as I do reflect on it, and I do a lot, nobody saw this coming. 

The Big Picture's Barry Ritholtz posts an insider's email, clearly detailing that those in the know CLEARLY knew what was going on.  And any reasonable person knows that it couldn't go on forever.  Industry had to know the good times wouldn't last, but greed gave them tunnel vision and caused them to ignore financial certainties.

Everyone was saying the same thing: Home pricing cannot continue appreciating at the same rate, and the second this thing turns, we are FUCKED.

Is it really any surprise to anyone that the mortgage business got too far ahead of itself?  To me, the only surprise has been it took so long for all of this to happen."

[…]

"The answer is quite simple: DEAL FEES. I gotta keep buying collateral, in order to keep issuing these transactions as a CDO manager. Its my job: I gotta keep accumulating collateral, and I gotta issue the liability against that collateral.

[…]

But no one wanted to be the first to acknowledge it fearing that they'd miss the opportunity to participate in big fees, big alpha, etc. . . ."

And now that the badly priced risks, CDOs, hedge funds, and other derivatives are taking a pounding, the financial wizards are getting nervous that their scalps are next, as passionately demonstrated by CNBC Mad Money host Jim Cramer:

I beg to differ.  As a matter of fact, many non-experts have been questioning how long an uninterrupted period of housing appreciation could continue, and what would happen when the cheap money dried up.  You can't ignore fundametnals.

Of course, the moral hazzard of personal greed by several parties, not just in the financial sector, kept the waters frothy.  Pundits, investors, homeowners, newspaper owners, realtors, developers, and municipalities have all gained from the bubble.  And let's not forget, 40% of the post 9/11 jobs were a result of the "housing boom".  Feel free to insert the metaphor of a frog and a boiling pot of water.  Add to the equation that this is not an individual circumstance - this failure is systemic and structural, and the natural outcome for our financial system, almost as if by design.  A house built on debt cannot stand.

One of my primary concerns was that as housing values exploded, with consumers who were not home shopping tapping out the equity in their homes, wages have been continuously stagnant.  Indeed, the entire tepid recovery was debt financed, which is also not a sustainable outcome.  Surely those in industry and Congress knew someone was going to have to pay the piper - why else would one author the Bankruptcy Reform Bill, making it harder to get out from under debt?

I initially thought that there should be no bailout - that investors should pay the cost for their over-speculation.  But this article questioning what the post 9/11 recovery would have looked like without the housing boom, tells me that it likely saved us from recession.  That said, what's the exit strategy, who pays, who wins, and who loses?

Dan Gross seems to be one of the only voices advocating for the homeowner : 

"If we can bail out Chrysler, why can't we support the American homeowner?" Gross wrote in his monthly investment outlook on PIMCO's Web site.

"This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hard-working Americans whose recent hours have become ones of frantic desperation," said Gross, a founder of the fixed-income investment firm PIMCO and a columnist for Fortune.

"Write some checks, bail 'em out, prevent a destructive housing deflation that (Fed Chairman) Ben Bernanke is unable to do. After all 'W', you're 'the Decider,' aren't you?" Gross wrote.