Sub-Prime Meltdown
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Sub-Prime Meltdown

Sub-Prime Meltdown

What the mortgage banking industry can teach us about Rosh Hashana.

by

Over the last few months Wall Street has been on a roller coaster ride, with the markets gyrating wildly in response to the sub-prime mortgage melt-down. World central banks have stepped in to add liquidity to the credit markets, and talk of a savings and loan style bail-out has been bandied about in Washington.

As a former investment banker, I find the financial details of the crisis fascinating, but what intrigues me even more is the psychological lessons that we can learn about human nature from this unfolding debacle.

It seems that mankind knows no limits to the lengths it will go to hide from reality, when it is more comfortable -- or in this case lucrative -- to believe instead in some self-styled illusion.

And the more you look at the unraveling story, it seems that from all sides parties with a variety of interests came together to build a house of cards, which would inevitably have to fall, because it was built upon air.

Credit was easy, as the Fed pumped money into the economy in response to the Asian financial crisis of the late ‘90s, the bursting of the tech-stock bubble, and after 9/11. The flood of overseas savings and easy credit fueled a surging housing market and leveraged buyouts with seemingly no end in sight. In stepped investment banks, hedge funds and rating agencies who designed and pushed a whole new genre of securities backed by these sub-prime mortgages.

Greed kept the blinders on everyone.

Standards for getting a mortgage were in free-fall, yet because house prices kept rising, defaults were low, so rating agency's boosted the credit rating on the bonds above their realistic risk levels. Everybody held onto a piece of this dream: home owners, speculators, mortgage companies, investment banks, rating agencies, and a whole host of their buy-side clients.

The only thing that could keep this financial Titanic afloat was a continual rise in the price of housing. But housing prices had been going up steadily for a decade. A decline was inevitable. Yet the longer the market surged, the greater and more risky mortgages were written and packaged to be sold on Wall Street. Fees and greed kept the blinders on everyone. I can almost hear the crash!

Reality or Illusion

All this tells us something really important about life. We have an incredible propensity to deny realities that we would rather not consider, in favor of holding onto illusions that make us feel good -- or line our pockets. And we easily forget the last time we were burned by the same affliction. Wasn't it just six years ago that Wall Street was burned last when the dot.com bubble burst with just the same type of wishful thinking?

Another point seems to be worth making. Sometimes denying reality involves purposely looking away from facts that will upset the apple cart. A libertarian website, The Daily Reckoning, made the following observation: "The Law of Stupidity tells us that useful information declines by the square of the distance from its Source. As the lending business became more ‘sophisticated' and layered, lenders and borrowers took leave of each other. Finally they forgot that they had ever met. It didn't matter, as long as the fees kept piling up at every stage of the transaction."

The shofar calls us back to Reality.

On Rosh Hashana, we hear the shofar blow. It is a call to wake us up from our slumber, from our dreams. It beckons us to take a good look at the various aspects of our lives, and to save ourselves from the illusions that have seduced us, sometimes through complacency, sometimes from less pure motivations.

Why is it better ultimately to live in reality than in comfortable illusion? It's like the kid who thinks that his greatest pleasure will be eating the five-pound jar of jelly beans after the baby sitter has fallen asleep on the couch. However, the short-live pleasure pales in comparison to the eventual pain he will experience in the emergency room later that night. When our illusions get smashed on the jagged rocks of reality, the result is pain -- physical, emotional and spiritual.

Keeping our eyes on reality, in all aspects of our lives is our best opportunity for real, enduring pleasure -- without unnecessary pain.

The shofar calls us back to Reality. It also calls us back to our Source; into a renewed relationship with our Creator. The unraveling of the mortgage bubble began with the growing distance between lender and borrower. Our own spiritual sub-prime meltdown also begins with a distance from our source -- God.

We have strayed from His mandate, from His Torah, from our relationship. The shofar beckons us to reconsider how this relationship has frayed, and how much we lose because of it. The shofar is a cry from deep within to be more. To be better. To love living in the beautiful, solid, happy world of Reality. To come home.

Published: September 8, 2007


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Visitor Comments: 1

(1) Esther, October 23, 2007 1:14 PM

Another lesson for the community

When we spoke to our rabbi about financial issues we were facing, we were encouraged to take advantage of "illusions" such as this kind of mortgage. There were many members of our community who worked in the financial world who not only didn't warn people not to do these risky things, but some even encouraged it. Leaders in the community who are in a position to guide others should educate their community about financial responsibility and not living off illusions.

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