The Vermillion Rotary Club held its weekly meeting on Tuesday, Feb. 8, at the Neuharth Center on the USD campus. President David Hussey opened the meeting and also gave the invocation.
A round of singing, announcements, and the introduction of guests including three seniors from Vermillion High School followed this. The students told us a little about their involvement at school and their plans for the future.
Rotarian Barry Vickrey introduced Dr. Mike Keller, the dean of the Beacom School of Business, as the speaker for the day. Prior to coming to USD, Dr. Keller had spent several years in the financial services industry. His presentation concerned the current mortgage-housing crisis. His working title was "Why Do Smart People Do Dumb Things"?
He outlined for us the principle players in the crisis. On the one hand there are the homeowners/borrowers. These people are trying to do the best for their families. On the other end are the owners of mortgaged-backed securities. These include pension funds, insurance companies, hedge funds, banks and S&Ls and many others. The first group he labeled the Dream Seekers and the latter group the Yield Seekers. Between these groups are the Middlemen. This group includes mortgage originators, brokers, basically the mortgage packagers or servicers.
The Middlemen basically find the people who need mortgages, package them, and pass on the mortgages to the Yield Seekers (who expect a return on their investment). The Middlemen collect a fee but face little risk. The Middlemen and the Yield Seekers are both governed by many regulators (government).
Mr. Keller said we must think that most of them are reasonably intelligent. Most regulators are intelligent also. Since the Middlemen and the Yield Seekers are professionals we must also assume they know what they are doing.
Everyone involved knew that there was some risk. Borrowers know they should only borrow what they can repay. The Middlemen measure the risk and put the mortgage together so that borrowers will borrow and Yield Seekers will lend. This has been going on for many years. The principle is very well known. Everyone knew the risk.
Many people were very surprised when the market imploded. What caused so many to lose their way? A good part of the answer lies in the history of the mortgage market. Home prices had risen for the past 20 years. One could count on selling a home for a profit. The Middlemen always won. Yield Seekers always made a profit. Everyone forgot that they could possibly lose. Everyone thought the rules had changed and there was no longer any risk. Wall Street thought that clever deal structures would win out over risk management.
A lot of money was trying to find higher yields. Ignoring the risks was like building in a flood zone. Roll the dice and hope it didn't happen to you. Greed and complacency became rampant.
Most of the real experts didn't get burned, but some did. Countrywide was a loser and lost about 80 percent of their business. However, the biggest owner sold his interest shortly before the bust. He was a big winner. Wells Fargo was a winner because they resisted the lure of easy money.
Washington Mutual took a big hit, as did others. Interestingly the government (Fanny Mae, etc.) lost some market share but didn't take on the bad loans. The regulators could have prevented a lot of the worst loans, but didn't.
Many investors could have avoided the risky loans, but didn't. Many builders over-built and are stuck with large inventories of houses.
Mr. Keller said the end may not be here yet and that the housing market may be depressed for some time to come. He then answered questions from the audience.