Corrente

If you have "no place to go," come here!

Must-read on "strategic defaulting"

And as a bonus, it's a Megan McArdle takedown. Interfluidity:

Businesses have operated and should operate under very different norms than individuals in their interactions with one another. We have, and have long had, the expression “it’s just business”. [However, see under "Bust out."] When spoken by one businessman to another in the context of even a tragic transaction, like calling in a loan that will force a firm to fold, we recognize the words as legitimate, a kind of apology. But if a businessman uses the same phrase while creating trouble for an individual in her role as customer, tenant, or borrower, it marks the businessman as, well, a jerk (to use McArdle’s very excellent descriptor). Behavior at the interface between businesses and individuals in those roles is supposed to be governed by interpersonal rather than intercorporate norms. [That is, at the interface between "persons" and "artificial persons."] Expectations of reciprocity still apply. There have always been businesses that sought every legal cover to profitably mistreat people. But such businesses used to be disreputable.

As McArdle acknowledges (I think) with respect to revolving debt, over the past few decades [the conservative ascendancy] the financial industry has increasingly applied the norms of hard-nosed business to its interactions with customers [rent-seeking behavior]. Certainly, a home mortgage to an unrelated party is too high value and dangerous a transaction to be regulated by social norms alone. Lengthy contracts are necessarily involved. But that doesn’t absolve a business from its responsibility to craft financial products in a manner that conforms to interpersonal expectations of fair-play. Along a whole variety of dimensions, the financial industry has increasingly violated those expectations. Lenders drafted contracts with fees ["rents"] and other “revenue enhancers” ["rents"] that borrowers are unlikely to fully understand, and profited ["rents" over and above the interest] when borrowers managed them poorly. They enthusiastically marketed ["rents" as sales commissions] loans to individuals whom they were perfectly able to foresee could not easily bear the debt, against collateral whose valuation they knew to be dodgy, then sold ["rents" as commissions] those loans via circuitous paths to investors who literally could not know what they were buying. Mortgage lenders suborned appraisers ["rents" for the appraisers in the form of fees] to soothe both buyers and funders with overoptimistic valuations. The normative breakdown went both ways: individuals preyed on businesses too. The gentleman receiving large commissions ["rents"] selling unsuitable loans, perhaps prodding the borrower to overstate his income, may have been betraying his employer (or [probably] not, depending on who was ultimately going to bear the risk of the loan). Certainly the ruthless flipper was violating interpersonal norms when she took a mortgage she knew she could not afford, gambling that a huge upside if prices rose was worth a downside limited by non-recourse or bankruptcy. But she was hardly alone, and she could be forgiven for believing that those norms no longer applied at the interface between banks and customers. They did not.

Read the whole thing, and the useful bibliography at the end. This post is a tremendous resource.

NOTE Where's the feminist aspect here? Since it's finance, there surely is one ;-)

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