The Working World

Out on the Street: The Real Credit Crisis

Each week, “Joe the Trader” chronicles his experiences with life after Wall Street.

While it was old news, I was still left speechless by the article a fellow member of the He-Man’s Unemployment club recently sent to me. In early January, Newsweek published “The Case for Walking Away,” in which the author suggests that 2009 is the year to file for personal bankruptcy.

Don’t wait until it’s too late, the article advises. Indeed, “the right time to file for bankruptcy is when you’re financially stuck but still have assets to protect.” It is truly a sign of the times when a major news magazine is actually advocating such a thing.

Due to a few twists and turns, not the least of which is a divorce agreement struck at the top of the market and, well, being unemployed, I too am concerned about being “financially stuck.” But even more problematic is that my ex and the kids moved out of what had been the family house and started renting in a better school district just before financial armageddon hit. In other words, my financial liabilities increased at the exact same time that my assets and income decreased. Selling the house now would surely lead to a significant loss and could put the house in negative equity territory (where the loan amount is larger than the value of the home). It seems that Newsweek would have me protect the rest of my assets by filing for bankruptcy.

Clearly, I am not alone in this situation. In fact, nearly 25% of all homeowners have negative equity in their homes. For ten months running, new foreclosure filings have been over 250,000 per month. And with layoffs accelerating and a new wave of adjustable rate mortgage resets to come, this picture is likely to get worse.

While Newsweek was focusing on the debts of the living, the New York Times recently ran a profile of a firm that collects debt from relatives of the deceased. That sounds reasonable (I guess), except that relatives generally have no legal obligation to pay up. The debt should be paid by an estate, if there is one. To help persuade the relatives DCM Services has hired people like Autumn Boomgaarden (whose last work was probably as the St. Pauli Girl), who practice “empathic active listening.” As Ms Boomgaarden notes, “you get to be the person who cares”—and I guess also grease a little pocket change out of a grieving relative.

So what do these two news stories have in common? They highlight the fragility of our financial system and the crisis we are in.  DCM’s practices are yet another example of taking advantage of the uninformed. Individuals across the income spectrum have been bilked out of cash by predatory lenders, debt collectors and sophisticated financial sociopaths like Bernie Madoff. On the other hand, if people follow Newsweek’s advice and preemptively file for bankruptcy, then lenders will disappear. Where is the integrity from borrowers and lenders? Indeed the word credit is derived from the Latin credo, “to believe.” If integrity goes who will believe anybody? The current situation is truly a crisis of credit.

“Enough of the moral high ground Joe,” I can hearing you saying. I agree it’s tedious, and who knows when I’ll regret my position in this note. So forget morality for the moment: the choice to declare preemptive bankruptcy is also self-defeating. In Econ 101, we were taught that the individual self-interest of consumers and of profit-maximizing firms in the economy led to optimal outcomes for society as a whole. But those of us who managed to stick around for the advanced seminars learned about market failure. One of the great parables of this is the “Tragedy of the Commons,” where, despite the fact that individuals are acting in their private interest, society ends up worse off. A town’s herders are able to let their livestock graze on the town’s common ground. Each herder is incentivized to have as many animals as possible, since there is no additional feeding cost for him. If each herder makes the right individual economic decision, over time there is overgrazing, the common land is ruined and livestock dies.

The same analogy can be applied to our modern financial system. It may well be in my self-interest to mail in the keys to the bank, and much of the stigma has been removed. But if enough Joe the Traders do this, the banks and the economy will be in even worse shape. I’ll choose to be a good economic citizen—at least for now.

Joe the Trader spent 11 years as a proprietary trader at a major U.S. bank. He has three children and currently lives in Brooklyn.

Tags: bankruptcy, credit, Out on the Street, personal finance, real estate, relationships, spending, The Unemployed Life, The Working World, Wall Street