As a Certified Financial Planner TM professional I strive to maintain neutrality. It is the opinions of my clients, and not mine, which matter most. Occasionally, financial issues arise and clients want both an education in the matter as well as my thoughts. The recent Bear Stearns bailout and now the attention drawn to Fannie Mae and Freddie Mac brings to forefront issues which we must address.
All three of these institutions suffered as a result of the mortgage crisis. A friend of mine likes to describe the mortgage mess as the result of "when the greedy met the stupid". Essentially, people were buying houses with loans they truly could not afford, and no one stopped them because there was too much profit to be made when the loan (along with the associated default risk) was sold to someone else. It was a very profitable game of hot potato, and the looser is the owner of the loan when it defaults.
But housing is an essential need. When a family can no longer maintain the mortgage on their home, where will they live? Added to the sociological impact the housing sector also plays a key role in our economy. As defaults rise so does the supply of available houses which, in response, have lower values. All this ripples through to the construction industry and associated sectors like building materials. Business slows… jobs are lost… more people encounter financial difficulty… and the cycle perpetuates.
In financial sectors the pessimists are looking for any reason to panic. When any financial bad news comes across the headlines, SELL becomes the word of the day and the market indexes fall. With the housing markets AND the investment markets in rapid decline, the government must consider intervention.
But this has raised an entire new circumstance we have never seen before. As the government takes prudent action to protect the housing markets, investment markets, and the economy as a whole they have introduced the concept of "too big to fail". Essentially, it was decided that if Bear Stearns were allowed to die a natural death it would lead too many other firms to failure and our economy would be critically affected. So the government did what it could to limit the damage and bring the situation to a soft landing. Now, the process is being repeated with Fannie Mae and Freddy Mac.
Mine is a question of accountability. We cannot give license to corporate executives to seek profit regardless of risk with the knowledge that their firm is "too big to fail". Government bailouts provide an unintended safety net to profit motive; the corporation gets all the reward while the tax payers pay the price for their failures. I implore our government to seek accountability from these executives. The safety net should come with a hefty price tag to be borne by the responsible executives. To collect an excessive compensation and immediately vested lifetime benefits for the complete failure of their organization should become a criminal act.
Without personal accountability, business schools will soon be teaching a new corporate mantra; "What, me worry?"
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