Tuesday, May 11, 2010

JPMorgan Chase chastened

JPMorgan Chase is now worried that more homeowners with "underwater" mortgages will act like, well, Chase's partner in crime Morgan Stanley, by defaulting on their loans.

Check out this story.

The investment-banking pyramid scheme is based on the premise that the fools at the bottom will continue to pay those at the top when it's not in their financial interests to do so. Afterall, those at the top need to maintain those billions in bonuses while those at the bottom lose their jobs.

Morgan Stanley is a master at "strategic defaults" because it knows it helps the bottom line -- bigtime.

From the Huffington Post story: "About one in eight defaults in February were strategic, according to the an April 29 research note by a team of Morgan Stanley analysts led by Vishwanath Tirupattur. Strategic defaults are those in which the homeowner could have continued to make payments but chose not to. The rate of strategic defaults has tripled since mid-2007, notes Tirupattur."

(Morgan Stanley was spun off of JP Morgan in the the 1930s when the Glass-Steagall Act forced commercial and investment-banking activities to be separated. Glass-Steagall was repealed in 1999, which helped fuel the Great Recession.)

In January, I urged homeowners in Central Oregon, where home values have fallen by 50 percent, to walk away and save their sanity, not to mention their financial health.

Check out my previous posting from Jan. 25, for more detail.

Late last year, Morgan Stanley walked away from five office buildings in San Francisco, losing about half of its $8 billion investment.

As Roger Lowenstein noted in a New York Times Magazine article in January:

"A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody said Morgan Stanley is immoral -- perhaps because no one assumed it was moral to begin with."

And yet, somehow it's immoral for a desperate family to act like Morgan Stanley and walk away from their financial obligations.

Even Freddie Mac, a culprit in the current crisis, is now concerned about strategic defaults.

From the Huffington Post story: " 'While I understand how that might well be a good decision for certain borrowers, that doesn't make it good social policy,' argued Freddie executive vice president Don Bisenius in a May 3 note. His main argument? It affects neighbors' property values."

Well, actually, strategic defaults threaten the viability of Freddie Mac and JPMorgan Chase among others.

More homeowners with underwater mortgages, where they owe far more than what their home is worth, should do the Morgan Stanley thing and strategically default. It's financially prudent and the right thing for you and your family. Even Morgan Stanley and JPMorgan Chase would see the wisdom in such a move.

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