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Friday, April 23, 2010

From the Wall Street Journal: The Foreclosed Families of Abacus

My students and family laugh at me because of my overuse of the word poignant. Their laughter is justified; I think I used that very word in this very space in citing a sonnet written by John Milton.

One hardly expects to see a piece that (implicitly) calls for social justice in the venerable Wall Street Journal. Yet there is one. Alongside all the "I really can't relate to this" articles on the Goldman Sachs suit, the outsize bonuses paid to the loyal troops, the outsize profits of the banks, and all that, we have a photo essay of the houses (middle-class one and all) and families (ditto) whose mortgages were bundled in the "Hope this fails" package put together by the math whiz M. Fabrice Tourre on the instructions of his higher-ups.

See it here.

I'd say poignant is justified.


simple in France said...

Disturbing stuff all around. I did think it was interesting that the mentioned that the homeowners were making a gamble, much like Goldman Sachs. I wonder if they'll get caught up on a technicality or not. . . really, it doesn't matter, I guess. The damage is done and the real problem is that the most abhorrent part of what they did actually turned out to be legal.

Duchesse said...

When people don't consider what could happen in the case of an accident (and therefore, get disability insurance) or say their mortgage payment was "too big from day one", I think they need better judgment and financial management skills. In 1985, as two freelancers, we bought a house we could carry on one income. I recall saying, 25 years ago "I don't want to bet the bank on whether we can live in our house."

I wonder how many of these people would have qualified for mortgages in my country (Canada), where mortgage products and approvals are much more conservative.

Shelley said...

It does seem to be a story about the wide divide between the very smart and the not very smart. Maybe it comes down to whether one feels the very smart should gain untrammelled wealth from their gift or whether they have any obligation to protect others not as well gifted. Then again, perhaps it's not so much about smarts, just about gambling. Who gambled and won, or lost, and did the winners have the opportunity to stack the deck?

I wasn't smart enough to fully understand the whole Abacus set up, so I'm clearly not gifted, which is why I don't tend to gamble.

Frugal Scholar said...

@Simple--Yes, but the mortgage broker, bank rep, etc had the "aura of expertise." Yeah--legal--and they benefited financially--tremendously.

@Duchesse--True, I totally agree. BUT not everyone is as cautious and financially literate as we are. I would never do this. But I am used to saying no to so-called experts. See above--for comment on "aura of expertise."

@Shelley--Exactly. But I think the buyers didn't quite know they were gambling. All the experts were telling them they were investing.

The Grouch said...

I don't have any sympathy for Goldman, but they didn't originate the loans or force these people to take out the mortgages. In fact nothing they did in ABACUS influenced the ultimate outcome of these loans. They were a broker/market maker of a synthetic CDO (no fiduciary responsibility, unlike a registered investment advisor), which by their very nature require one set of parties to be long and another set to be short, better against each other. All parties who entered into the transaction knew this. The loser in this transaction was ACA, the company who selected the mortgages and took the largest long position before going bankrupt, and the taxpayers of Germany and the UK who had to bail out their own stupid banks who signed up for the long side of the deal. Synthetic CDOs serve no social or financial purpose other than allowing banks to gamble on outcomes, and one party will always lose in this type of transaction.