By DAVID MOON, Moon Capital Management
I don't always anticipate which specific risks might reach
up and bite me in the assets.
As a professional money manager with
supposedly impressive initials after my name, I thought I had considered most
types of hidden risks. But your elected officials just threatened us with one
completely out of the blue:
You may be responsible for the mess
in the subprime mortgage market.
If you own any mortgage-backed bonds
or you are invested in a bond fund which owns bonds issued by folks like Fannie
Mae, the top Democrat and Republican on the House Financial Services Committee
say you ought to be held liable if those bonds are used by banks to loan money
to people who can't afford it.
Chairman Barney Frank (D., Mass.)
and Spencer Bachus (R., Ala.) argue that investors who buy these bonds make it
possible for banks and other mortgage originators to make risky mortgage loans.
If the capital wasn't so readily available from bond investors, the banks
wouldn't be so anxious to make all those subprime loans.
'More money was
being lent than should have been lent,' says Frank. Given that 87 percent of the
subprime mortgages are not in default, I wonder which of those homeowners he
thinks should not have been granted a loan.
No specific legislation is pending
that would place liability for failed mortgages on the investors in the bonds.
But Congressman Frank predicts that a bill will pass the House this year. He
says that the mortgage-bond market has provided 'liquidity without
Did you realize you were being
irresponsible when you were just trying to get a little extra yield on your bond
But what about the responsibility of
the people who borrowed the money in the first place? 'Well, I just figured if
the bank would loan me the money, that meant I could afford it.'
I suppose it's asking too much for a
bill outlawing stupidity.
I would be amazed if Congress passed
a law that assigned liability to holders of existing bonds. But it wouldn't be
the first time our elected officials, the servants of the people, passed some
strange and painful retroactive legislation.
What Congressmen Frank and Bachus
seem to overlook is that holders of mortgage-backed bonds already bear liability
in the subprime mortgage market. Those subprime loans are the collateral for
$540 billion of the $2.12 trillion of mortgage-backed bonds that were sold in
If enough borrowers default on their
loans, it's not the banks that lose ' and it's not the homeowners who are the
biggest losers. By far, the biggest potential losers are the folks who funded
those loans in the first place.
And we don't need any additional
legislation to create that potential liability.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).