AP Article Asks: If Tishman Speyer Can Walk From Biggest Underwater Morgtage, Why Can't You

I believe the fact that we have a system that divvies up responsibility in a way that feels unequal is more responsible for it perhaps being unequal than the people who choose to take advantage of the system itself (think of double-dipping in Ohio as a similar issue: the law allows people to retire with public pensions and then be rehired into the same job after retiring; we may not like it, but it is legal). 

But the bottom line of why we allow commercial enterprises to bail, without penalty, while individuals must pay the price, literally, probably relates to the fact that typically, in a capitalist society, we want to encourage risk-taking by businesses that are willing to take on risk and, because of their immenseness and often their diversity, they can better manage loss.  Capitalism relies on encouraging risk because we believe that - and capitalism values the belief that - risk will produce positive and desirable results.

The problem, of course, comes when risk doesn't produce an upside - when taking risk, like thinking the housing market bubble will keep growing and either never burst or you'll know when it is going to burst and you can get out without suffering, leaves you on the downside.

And so, given what Pepper Pike City Council is facing regarding The Pointe at Sterling Lakes, I can understand why an entire article has been written about commercial real estate developers walking away when individuals cannot.  A snippet from the AP piece:
Tishman Speyer Properties walks away from 11,232 Manhattan apartments because it can't pay its mortgage. That's good business.

Rick Gilson, a college custodial supervisor in South Dakota, wants to walk away from the mortgage on his mobile home. If he does, he'll be a deadbeat.

Those two borrowers face the same financial dilemma: Their mortgages far exceed the values of their properties. Yet one gets to walk away without guilt, while the other can't.
I've had a chance to speak with long-time banking folks from both Huntington and Fifth Third, two area banks that did not get into the sub-prime lending morass, for the most part.  And I asked each of these folks, why - why is that your bank's people knew or decided not to take the risk when others decided that the risk was worth it? What was the difference between your calculations and decision, and theirs?

Both said the same thing: greed.  The attraction to the money that could be made.  Beginning, middle and end.

That's not, in and of itself, an evil. Again, our economy is based on capitalist principles.  But what I believe has caused so much of the anger and frustration related to this particular phenomenon in the current recession is that the burden of the risk seems to be borne so unevenly, and unfairly: our system rewards the businesses for risks that lead to good returns, but it shields them from the loss of bad returns (in order to encourage them to take the risk in the first place) and we - individuals who are usually least likely to be able to absorb the loss, do not get the same benefits simply because we too subscribe to capitalism.

The law's provision of a corporate veil, to protect corporations from legal liability, serves a similar function in terms of shifting the burden of suffering.  To encourage corporations to spend and innovate and produce, we give the individuals who run them protection.  Likewise with government - they get immunity because they must be able to carry out certain functions free of anxiety related to the carrying out of some of those functions.

But is making the individual suffer the only choice?

Sadly, as I think about the proposal being made by Sterling Lakes to alter its agreement so that a builder can build more units that will run a risk of not selling (in addition to eight that currently are unsold), Council indeed is choosing between least worst options, none of which have any remotely sure outcomes.

No comments: