We all know the story of the Three Little Pigs.
The fable focuses on a trio of swine and their tragic plight at the hands of the Wolf.
Universally, in the court of public opinion, it’s the Wolf who takes the rap.
Everyone has sympathy for the two porkers that perished while applauding the little fellow who had the foresight to build his home from bricks.
The Wolf was only doing what came naturally. How could anyone expect him to suppress his urges, especially when it came to ham steak?
I See Parallels
It sounds a little like the housing market.
In our little homily, homebuyers represent the piglets. Banks would be the big bad wolf. The problem is finding a real villain in the story.
Homeownership is an irresistible element of the American dream. Everybody wants it, doing nearly anything to get it.
At no time in our history, with the possible exception of the post-World War II era when the G.I. Bill provided easy financing to veterans, have more people been able to own their own homes.
Although lots of folks had no real business owning homes because of their shaky credit or questionable finances, no one could really blame them for reaching beyond their means to capture the gold ring.
Now that the air has gushed out of the real estate bubble, banks and bankers are taking the rap. But like the Wolf, they were only doing what came naturally.
Hopeful homebuyers were like ham steaks. Cheap interest rates and easy credit served up on a platter. The free market at its best and worst.
Once the home-buying fever took hold, it was predictable that outfits like AIG and Lehman Brothers would devise ever more complex ways to prosper while they kept the ball rolling. With record low interest rates, money was flowing like cheap champagne at a Las Vegas wedding.
Mortgages became a fungible commodity; and these guys created a market for the risk. Everyone seemed to want a piece of the action.
It was equally inevitable, and almost unavoidable, that otherwise staid credit rating firms like Standard & Poor, Fitch and Moodys would join the frenzy. Someone had to book the odds.
He Did It. No, the Other Guy Did.
Because everyone was flush, no one really seemed to notice or care these guys were ratings risks, like a famished fat man at buffet.
In the tragic aftermath, when the market was in a shambles, everyone, including the bankers, started pointing fingers at everyone else. Wolf and prey alike wondered: “What happened to the regulators?”
Just as it was foreseeable that lower than low interest rates would whip the housing market into a froth, it was no surprise that regulators would stand idly by while mortgages made of sticks and straw burst into flames. Even if they had stepped in to cool the blaze, they would have been decried for fiddling with free market forces.
In truth, the rise and fall of the housing market was more like the parable of the frog and the scorpion.
Standing at the edge of the river, the scorpion was looking for a way to get to the other side. Not being able to swim, he sought the aid of a friendly amphibian. He promised the frog a reward if he ferried him across the torrent. The frog, of course was reluctant, fearing that the scorpion would sting him if he allowed the crab-like arthropod to hitch a ride on his back. Convincingly, the scorpion assured the frog that such uncontrolled behavior would be suicide. The friendly frog was taken in by the scorpion’s logic, and bid him to hop aboard.
To any casual observer, the outcome was obvious.
Everyone knows that it was only natural for the scorpion to sting the unwitting and trusting frog. But it was also inexorable that the frog would eschew the risks because he couldn’t imagine that the scorpion would act against his own best interests.
If we use this allegory to look back at the housing crisis, it’s truly a thorny task to find the real scoundrel or quarry. In many ways, everyone was duped by the promise of promise and prospect of prosperity.
When the housing boom was at its peak, everyone thought there’d be a perpetual supply of ham steaks. No one believed the larder would fall empty.
In the end, the outcome was as nearly predictable as it was natural.
Poor Wolf!
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
