Appraiser 'Batting Averages?'

Adding Back Checks & Balances

If you haven't been paying attention, there seems to be widespread consensus that much of the "recent unpleasantness" (what some people in the South called the Civil War) has to do with too few checks and balances in the financial system.

So, one of the reasons that securitized mortgages became such a mess is that everyone involved had an incentive to simply collect their fee, and keep the "product" moving along the assembly line.

Clearly, that "assembly line" -- now very much idle -- is going to be overhauled at best, dismantled at worst (or is it the other way around?).

No matter what happens, though, we are still going to have mortgages, banks, appraisers, etc. (and hopefully, Realtors!).

In that vein, one of the ideas I've heard lately is to rate -- or at least track -- appraisers by the default rate associated with homes they evaluate.

Appraiser "Batting Average"

Ultimately, the appraiser's job is to give the bank that dispatched them a "pass/fail" verdict on the subject home: if the bank proceeds to make a loan (mortgage) on the home in question, will it get paid back? And if not, is the collateral (the home) worth enough that the bank can sell it and recoup its capital?

Obviously, there's more that goes into that determination than the home's market value at the time of purchase. For example, if the Buyer subsequently suffers a major illness or loses their job, they may default on the mortgage even though the appraiser nailed the price.

However, that's what averages are for.

Just like a major league baseball player needs to hit over .250 or so (a Hall of Famer hits over .300 lifetime), you'd expect a good appraiser to have a "success rate" over .95 (ideally, .97 or .98).

P.S.: speaking of accountability, I loved this sentiment from Caroline Baum's most recent column for Bloomberg: 'members of Congress should be compelled to wear uniforms like Nascar drivers, so we could identify their corporate sponsors.'

So, Chris Dodd, head of the Senate Banking Committee, would sport a pink Lacoste shirt with “endorsements” from Citigroup, Bear Stearn, AIG, etc. emblazoned across his chest in large, black letters (the corporate logos go on the back).

Financial Manslaughter -- or Murder?

How Culpable is Wall Street?

"The pressure on financial engineers . . . has been to compete to get new products out the door quickly, with their firms showing little patience for multi-year research and development. It's too bad these new products could not be labeled "beta" . . . to warn that products are not fully tested and still need work."

--Gordon Crovitz, "Time to Reinvent the Web (and Save Wall Street); The Wall Street Journal (2/9/09)

When the dust from the ongoing financial/credit crisis finally settles, the fundamental question society (and likely, judges and juries) must ask is, "did Wall Street commit financial manslaughter? Or is it guilty of something worse, like homicide?"

The difference goes not just to remedies and punishment, but to how we design our future financial system -- the current one's broken -- and prevent recurrences of the current melt-down.

So what's the difference between murder and manslaughter? The perpetrator's intention, and state of mind.

If you're speeding and driving drunk, and inadvertently veer off the road and kill a pedestrian, you're guilty of manslaughter. You may not have intended the result, our legal system says, but the decision(s) you made and your subsequent actions created the risk of harm. As a result, we're going to hold you accountable.

By contrast, murder requires premeditation. The gradations of murder -- first degree, second degree, etc. -- correspond to how cold and calculated (vs. impassioned and spontaneous) the actions were.

What's all this got to do with Wall Street?

Clearly, Wall Street decision makers created a system with enormous risk . . . and it crashed. (I don't buy the line that government is mostly responsible -- when it comes to financial regulation, Wall Street pretty much gets what it wants. Or more accurately: blocks -- or circumvents -- what it doesn't.)

The question is whether all the people at Citigroup, Goldman Sachs, AIG, Countrywide, Lehman Brothers, Fannie Mae, Freddie Mac, etc. who were essentially flooring the accelerator had reason to believe conditions were unsafe (watch for the incriminating e-mail's).

P.S.: backing up over the victim -- paying yourself billions in bonuses while the wreckage is still smoking -- definitely tilts the scales towards premeditation.

Ferdinand Pecora*

Waiting For Accountability, Closure

"Our current stock market slump and housing bust can seem like natural calamities without identifiable culprits, creating free-floating anger in the land. A public deeply disenchanted with our financial leadership is desperately searching for answers. The new Congress has a chance to lead the nation, step by step, through all the machinations that led to the present debacle and to shape wise legislation to prevent a recurrence."

--Ron Chernow, "Where is our Ferdinand Pecora?"; The New York Times (1/6/2009)

Imagine if a spokesman for the National Transportation Safety Board ("NTSB"), at a press conference today, announced that, effective immediately, it was suspending its investigation into the US Airways crash into the Hudson on Friday.

"We simply can't justify risking our divers' safety in the river's treacherous currents," the NTSB spokeperson said. "What's important at this sensitive juncture is that we focus our energy on moving forward, not looking back, and not waste precious financial resources looking for scapegoats."

The uproar would be instantaneous and deafening.

U.S. air travel is the safest in the world precisely because after each and every mishap, the FAA, NTSB, the airplane manufacturer and all other relevant parties comb the crash site looking for clues, then exhaustively analyze them until they've located the cause(s).

Would anyone seriously argue today that that spirit of objectivity, scientific inquiry, and regard for the public's (financial) safety even remotely describes Washington's stance towards modern-day Wall Street?

There are times when it's appropriate to extend an olive branch to a vanquished foe ("with malice toward none, with charity for all . . "). However, what's needed in the wake of today's ongoing financial calamity isn't magnanimity (or amnesia), but scrutiny and accountability. Without those things there is no closure, and without closure there can be no recovery -- never mind preventing recurrences.

"Charity for all" can wait until Obama's second Inaugural address.

(Another year of George Bush, and "charity for all" might very well be what everyone's in line waiting for.)

*Ferdinand Pecora, who's overdue for a posthumous 15 minutes of fame, was the lawyer who led Congress' investigation into the Stock Market Crash of 1929.