Consumer Law

Times Reports on Causes of Mortgage Crisis, FDA Problems, and More

By Jeff Sovern

Robert Frank has a terrific column in today's Times, "Pursuit of an Edge, In Steroids or Stocks," explaining why fund managers were willing to invest in subprime mortgage-backed securities.  The entire piece is worth reading, but here are some excerpts:

If one fund posts higher earnings than others, money immediately flows into it. And because managers? pay depends primarily on how much money a fund oversees, managers want to post relatively high returns at every moment.

One way to bolster a fund?s return is to invest in slightly riskier assets. (Such investments generally pay higher returns because risk-averse investors would otherwise be unwilling to hold them.) Before the current crisis, once some fund managers started offering higher-paying mortgage-backed securities, others felt growing pressure to follow suit, lest their customers desert them.

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* * * Many money managers knew that these securities were risky. As long as housing prices kept rising, however, they also knew that portfolios with high concentrations of the riskier assets would post higher returns, enabling them to attract additional investors. More important, they assumed that if things went wrong, there would be safety in numbers.

The bailout suggests that last assumption is correct, because if the crisis were not pervasive, we probably would not have had a bailout.

And here is an editorial in today's paper, with the alarming title, "A Tale of Taint." about how the FDA hired a public relations firm (isn't that a wonderful use of taxpayer dollars at an underfunded agency?). The FDA was able to dispense with competitive bidding because it hired a minority contractor.  But the contractor then turned around and subcontracted the work to a "preferred Washington firm." 

The Times reported on Wednesday that "Many Foods Will Soon Be Labeled by Country of Origin."  Or at least meats, produce, and some nuts will be. 

On Sunday September 21, economist Robert J. Shiller had a column, "The Mortgages of the Future."  He argues for the creation of "continuous-workout mortgage" under which payments could be restructured routinely to respond to the changing ability of the borrower to make payments.

Full post as published by CL&P Blog on October 05, 2008 (boomark / email).