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Administration


A dangerous game

A dangerous game

If you think that there's no relationship between collapsing bridges and collapsing mortgages, think again. In both cases, the consequences of ignoring
  • Written by Bill Wolpin
  • 1st September 2007

If you think that there’s no relationship between collapsing bridges and collapsing mortgages, think again. In both cases, the consequences of ignoring failing infrastructure and the economic fallout from defaulting loans have affected our communities directly and, worse, were preventable.

With nearly 165,000 homeowners facing foreclosure in June alone, local and state governments are grappling with how to lessen the damage to their communities. However, subprime mortgage failures are part of a larger swindle cooked up for investors anxious to cash in on the housing boom, further damaging the economy.

The Ponzi scheme started with mortgage lenders who knew they could make risky home loans to scores of people with bad credit. They also knew that those risky loans could be sold to other investors quickly. That leaves the original lender with no risk, the borrower’s loan fees and the big bonus: having the money back to loan again.

The companies that bought the loans then blended the high-risk subprime mortgages (BBB or BB rated, for example) with less-risky ones (AAA or AA) and created mortgage-backed securities owned by an investment trust. The investment trust sold bonds, which would pay the investor from the borrowers’ interest and principal payments.

As housing sales zoomed, investment banks and similar financial players created a new security, a collateralized debt obligation (CDO), using riskier loans sliced from existing mortgage-backed securities. While all the slices taken from mortgage-backed securities were rated low, the bond rating agencies (who are paid by the investment banks) rated some of those slices as AAA credit.

Magically, CDOs gave the lowest-rated loans the appearance of mortgages given to credit-worthy borrowers. Often, investors in CDOs didn’t fully investigate them and now are being buried under the debris of the bonds’ financial collapse.

In the same way investors trapped themselves by ignoring the risks of CDOs, government officials are trapping themselves when they do not address structurally deficient bridges or any other part of the infrastructure. In a recent New York Times editorial, Samuel Schwartz, former chief engineer for the New York City Department of Transportation, described why some state and local officials may be delaying needed repairs. He wrote that if states and local governments “wait until bridges are in poor condition, they become eligible for federal funds.”

CDO salesmen may be playing hide and seek with the credibility of their product, but delaying needed bridge repairs is playing a more deadly version of the game — hiding from failing infrastructure and hoping the problems don’t find us. When they do, however, we often pay a price beyond anything money can buy.
bill.wolpin@penton.com

Tags: Administration

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