I spent a couple of years working at America Online earlier this decade, amid some people who were awash in cash from stock options. AOL offered “financial management seminars” that allegedly were designed to help those people, but they really were chances for various financial pros to pitch their wares.
I attended some of those seminars and found them educational — in both good and bad ways. I listened to the pros talk about the need to create good financial plans, the importance of estate planning, and the joys of budgeting. But I also stood there slack-jawed as snake oil merchants urged people to take big margin loans against their stock, and listened to big mortgage brokers tell folks to take out no-money-down, interest-only balloon loans.
In both of those latter cases, the salesmen suggested that Smart People should run — don’t walk, run! — toward these choices. Only idiots took out long-term fixed-interest loans; only fools wouldn’t leverage their stocks, the salesmen argued.
The dot-com crash of a few years ago took care of the latter Smart People, who learned the joy of the margin call and in some cases even went bankrupt. Recently the latter group was starting to get its comeuppance, as the little-publicized back ends of the various esoteric mortgages started to kick in. And the banks and investors who offered these ridiculous instruments were feeling the pain as well, and a recession — heck, even a depression — seemed possible.
Today, the president announced a voluntary agreement with the big mortgage brokers, in which they’ll put a five-year interest freeze on a variety of esoteric loans in very specific circumstances. I’d point out that the alternative would have been much worse for the brokers — the companies would have been awash in even more foreclosures, swallowed even more debt and many of them would have gone out of business. In other words, their actions would have had serious consequences. People have been known to call that sort of thing ‘justice.’
And that would have been really painful, but I remain unconvinced that the alternative is really better. At some point, the bill simply comes due, and it’s almost always better to face the bill sooner instead of later. A five-year freeze on payments allows the interest clock to keep spinning on your mortgage loan, and at some point, you’re going to have to confront that ugly reality. It’s going to be even more expensive to do that later.
The real lesson here is: Salesmen sell. Everything else, bad or good, is pretty much coincidental. Always treat a sales pitch with skepticism, particularly when someone is trying to get into your pocket for many, many years.
