Foreclosed Homeowners, Incompetent Banks, and Moral Hazards

When Congress returns from recess there will be an enormous debate about helping foreclosed homeowners and average Americans versus helping major investment houses at taxpayer expense.

For now, one point — the Fed-supported deal for J.P Morgan to buy Bear Stearns for $2 a share included one of the greatest fiascos in financial market history.

In the contractual agreement between J.P. Morgan and Bear Stearns is a “mistaken provision” that requires Morgan to guarantee Bear Stearns trades, even if Bear Stearns shareholders vote down the deal.

In short, if one believes the deal was urgently needed for Bear Stearns to avoid bankruptcy, the cost to J.P. Morgan of guaranteeing Bear Stearns trades, even if the deal is voted down, is catastrophic to Morgan.

Apparently neither the Board of J.P. Morgan, nor the Chairman and CEO of J.P. Morgan, nor the fleet of attorneys and investment bankers and accountants who put together the deal, nor the Federal Reserve Board that promoted and financed the deal, read or understood the contract they all wrote and reviewed.

Here’s the point, for today. When average Americans get screwed by corrupt mortgage firms, or by lawyer-written contracts that looked like fixed rates but were in truth variable rates, it is “moral hazard” for government to help them.

The moral hazard boys argue that if these people, average Americans, make a mistake they should be held accountable for their mistake. Even when they were victimized by fraud or complexity in contracts. They should pay the price and bear the burden and to help them, is somehow immoral.

On the other hand, in this case the CEO of J.P. Morgan was toasted by Wall Street for the “deal of the century,” worshipped on the business news for pulling off a $2 share price, yet he did not know what he was agreeing to. Nor did his board. Nor did his lawyers. Nor did his investment bankers. Nor did his accountants. Nor did his executive committee. Nor, until 24 hours ago, did Wall Street analysts. Nor did the Federal Reserve Board.

Help an average American, it is moral hazard. Bail these guys out for this performance, and it is Washington in the age and ethic of George W. Bush.