Mortgage Superfund Worrying Financial Experts

Although the Treasury may be involved with the concept of bringing together Citigroup, Bank of America, and JPMorgan to create a $75 billion fund to help prop up a sagging mortgage market, not all experts think it's a good idea. Alan Greenspan questioned whether it was wise to intervene in the market, as reported by CNNMoney.com and others. Today, the Financial Times reports that during a trip to South Korea, Warren Buffett has added his own voice of wariness:

“One of the lessons that investors seem to have to learn over and over again, and will again in the future, is that not only can you not turn a toad into a prince by kissing it, but you can not turn a toad into a prince by repackaging it,” Mr Buffett said during a one-day visit to South Korea.

“But very imaginative people in the securities market try to do that. If you have bad mortgages they do not come better by repackaging them. To some extent the chickens are coming home to roost for the mortgage originators and securitisers,” he said.

Both of them have expressed concern that the market should be the force stabilizing the situation, and not governments and banks. I'm not the most laissez faire guy in the world, but in this case I'd tend to agree. The people who set up these investments and who then promoted the hell out of them tried to build with sub-standard materials. You don't fix a wall by painting it. You fix it by finding the weak spots, reinforcing the structure where necessary and replacing the fallen plaster. (I use this analogy because it literally hits close to home, as I'm in the process of fixing a wall.)

To use the money to boost prices unrealistically might make some well-off people happy that they don't take a bath, but to be fair, many of the people who bought into these loans are bearing a heavy burden at the moment. Why should they be the only ones paying the price?

I can hear some people thinking it now: They should have known what they were getting into and seen that they shouldn't have taken more loan than they could afford. But we could say the same about the investment crowd. If anyone should have known what they were getting into, it should have been these people. That's what they do for a living. Artificially reduce the pain, and not only do you run the risk of only temporarily propping up this financial Rube Goldberg machine with a more painful crash to come, but no one learns anything from the experience. They become the Peter Pan crowd that never grows up and never learns that actions have their consequences. If they lose money, well, then they lose. Hopefully they will be more prudent about future investments, and they are also unlikely to face living on the street as a strong possibility, as are many who the very same investors expect to manage with increased mortgage payments and no greater financial resources.