Monday, January 30, 2012

I just looked up moral hazard in the dictionary...

and it said "See Freddie Mac":

I'm sure a lot of the folks doing these Freddie Mac deals are the same geniuses that traded CDOs 5 years ago. And I'm not using genius ironically here, they are actually very smart people who know how to take advantage of the system. The problem is (and has been for the past decade) that legal and moral aren't necessarily the same. Traders at Freddie Mac stand to gain billions if homeowners who are stuck in high interest rate mortgages are unable to refinance their mortgages. If a hedge fund made this trade I'd have no problem with it - its a perfectly legal transaction and helps the market price mortgage securities. My problem is that Freddie Mac determines whether these borrowers qualify to refinance or not. That completely messes up the incentives, this trade lets Freddie Mac profit by excessively tightening its refinancing standards. If that weren't bad enough Freddie Mac is now owned by taxpayers. Think about this for a second, our own government is giving Freddie Mac about $2 billion per month so that they can force thousands of homeowners to pay above market rates and collect bonuses. I'm less offended by the people doing this than the legal system that allows this to happen.

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