Strategic Default

I missed this NYTimes piece by Roger Lowenstein discussing how incongruous it is for big banks to be the main cheerleaders for the idea that people have a moral imperative to continue paying mortgages when their homes are underwater. This concept seems perilously close to a tipping point that would have disastrous results for the economy. What would the banks do then? Lowenstein, by the way, wrote the great, “Rise and Fall of Long Term Capital Management”, which is as good as, “Liar’s Poker” at helping to explain the genesis of this entire mess.

Think of private-equity firms that close a factory — essentially deciding that the company is worth more dead than alive. Or the New York Yankees and their World Series M.V.P. Hideki Matsui, who parted company as soon as the cheering stopped. Or money-losing hedge-fund managers: rather than try to earn back their investors’ lost capital, they start new funds so they can rake in fresh incentives. Sam Zell, a billionaire, let the Tribune Company, which he had previously acquired, file for bankruptcy. Indeed, the owners of any company that defaults on bonds and chooses to let the company fail rather than invest more capital in it are practicing “strategic default.” Banks signal their complicity with this ethos when they send new credit cards to people who failed to stay current on old ones.

Strategic Default

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