Money Men Say It's Time To Pay Piper

by George Waldon  on Monday, Sep. 29, 2008 12:00 am  

"Most of the issues before us today were absolutely avoidable," said Mark Millsap, co-owner of Little Rock's Foundation Resource Management. "Had we as a nation addressed them in a timely fashion, we would likely not have the turmoil that is before us today."

Four years ago, Millsap advocated – in a guest commentary published in Arkansas Business – the dismantling of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac).

His concerns about too much leverage and too little accountability proved to be on the mark as big problems waiting to happen, even as the duo helped make mortgage lending more carefree.

It was an atmosphere that four years ago caused Millsap to wonder: "Is there anyone who does not qualify for home financing these days?" The intervening months confirmed that many who did qualify shouldn't have, as loans were bundled together and marketed as investments.

The same mortgage-backed securities that all but swamped Bear Stearns sent Lehman Brothers scrambling for bankruptcy protection with $60 billion in troubled real estate-related investments.

Why did Uncle Sam step in with an $85 billion emergency loan to keep American International Group Inc. afloat days after saying no to Lehman Brothers? To prevent an even worse ripple effect than the bankruptcy of the nation's fourth-largest investment banking firm.

AIG sold default insurance to holders of risky debt such as mortgage-backed securities, which hammered Lehman Brothers and so many others. If AIG couldn't make good on claims and remain solvent, the financial fallout would splatter a host of banks, investment firms and others.

No one wanted to contemplate the fiscal chaos that would ensue if AIG didn't have the money to stand behind those default policies. And AIG is a legitimate, regulated enterprise, unlike other players in the $46 trillion credit default market.

That's an area that gave rise to entities that weren't subject to regulatory oversight, and some of those default insurers had little capital to back up the risk protection they were selling. They were in cruise control – reaping huge profits, until claims started coming in.

"Every time everyone is making money hand over fist, people forget about the rules," said Elijah Cunningham, president of ValuePoint Partners Inc., a Little Rock money management firm.

Among those rules is the law of financial gravity: Investments that go up in value can come down in value.

Cunningham believes action by the government to restore confidence and stability to the credit market will happen, even if it requires the full $700 billion proposed.



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