Forgive the clich?, but we have seen the enemy and he is us. Doug Dachille, writing in the Wall Street Journal, echoes my column this month in Boomer Market Advisor. Paulson’s bailout plan has so many problems it’s tough to know where to begin. Chief among them is the fiduciary responsibility that companies owe investors. Despite the demonization of the mortgage industry, most holders of debt are not investment banks, but rather your clients through their retirement accounts. Freezing interest rates violates the contract they freely entered into, expecting the maximum return for the given level of risk. As Dachille writes:
The retired schoolteacher who invested in a bond fund for retirement income did not intend to participate in reckless subprime lending transactions.
Mr. Paulson’s plan, with its “freeze the teaser” component to lock in low initial rates for borrowers has the effect of violating the sanctity of financial contracts. This is a troubling and potentially dangerous precedent for the government, albeit under the auspices of a “voluntary” program. From a practical, and indeed a fear-of-litigation standpoint, many servicers simply won’t implement this program, since they have a fiduciary duty to act in the best interests of their investors.
Paulson’s plan actually encourages a breach of fiduciary responsibility, and should be dumped.