The Fourteenth Banker Blog

November 17, 2010

Unsafe At Any Speed

Filed under: Running Commentary — thefourteenthbanker @ 1:39 AM

When I first became aware of Ralph Nader, he was already considered a flake by the New Economic consensus that would shortly sweep Ronald Reagan into office. I would have laughed out loud if you had told me that 30 years later I would quote him. In the preface to his book, Unsafe At Any Speed, he says the following:

This country has not been entirely laggard in defining values relevant to new contexts of a technology laden with risks. The post-war years have witnessed a historic broadening, at least in the courts, of the procedural and substantive rights of the injured and the duties of manufacturers to produce a safe product. Judicial decisions throughout the fifty states have given living meaning to Walt Whitman’s dictum, “If anything is sacred, the human body is sacred.” Mr. Justice Jackson in 1953 defined the duty of the manufacturers by saying, “Where experiment or research is necessary to determine the presence or the degree of danger, the product must not be tried out on the public, nor must the public be expected to possess the facilities or the technical knowledge to learn for itself of inherent but latent dangers. The claim that a hazard was not foreseen is not available to one who did not use foresight appropriate to his enterprise.”

These words speak of legal and social developments in materials manufacturing going on 50 years ago. Yet it is striking that we have not achieved these most foundational values when it comes to another kind of manufacturing, the manufacture of financial products.

The clock has completed its cycle on the day in which the Congressional Oversight Panel released its report on Mortgage Irregularities and the consequences for financial stability.

In addition to documentation concerns, another problem has arisen with securitized mortgage loans that could also threaten financial stability. Investors in mortgage-backed securities typically demanded certain assurances about the quality of the loans they purchased: for instance, that the borrowers had certain minimum credit ratings and income, or that their homes had appraised for at least a minimum value. Allegations have surfaced that banks may have misrepresented the quality of many loans sold for securitization. Banks found to have provided misrepresentations could be required to repurchase any affected mortgages. Because millions of these mortgages are in default or foreclosure, the result could be extensive capital losses if such repurchase risk is not adequately reserved.

The dawn will soon break in Europe, where volcanoes erupt with regularity. Today’s volcano is the Irish Debt Crisis and an apparent impending bailout or series of bailouts, this time more painful. I give you this link, not to endorse it’s assessment because frankly I don’t know. But the very fact that such extremity can be considered plausible and be posted to a highly reputable blog (not mine, Calculated Risk’s) paints the picture rather well does it not?

So back to the quote from Ralph Nader’s preface. “Where experiment or research is necessary to determine the presence or the degree of danger, the product must not be tried out on the public, nor must the public be expected to possess the facilities or the technical knowledge to learn for itself of inherent but latent dangers. The claim that a hazard was not foreseen is not available to one who did not use foresight appropriate to his enterprise.”

I heard a commenter recently say that in financial services, “complexity is fraud”.  I am becoming inclined to believe him.

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4 Comments »

  1. Thanks once again, Fourteenth, for good food for thought.

    Back in the early ’70s I got quite interested in the organic and health food movement – well, it was hardly a “movement” at that point, but a ripple. At any rate, that was when I learned that, unlike Europe, where companies, such as drug manufacturers, must prove their product won’t cause harm, in the good old U$ of A, it’s exactly the other way round. I wonder why the food and drug industries are exempt from Justice Jackson’s edict?

    An aside, I came across a wonderful term yesterday, a “triple bottom line”, which is one that reflects the “externalities”, as well as a company’s financial inkblot. I know it can never be implemented, but it’s a great idea……………

    Comment by Sandi — November 17, 2010 @ 9:03 AM | Reply

  2. Indeed a great post!!!

    For those who have not, I recommend watching “An Unreasonable Man”. It was amazing to me how far ahead Mr. Nader was compared to practically the rest of America.

    Another striking thing was that at least back in the 50s the corporate heads and the polititians could be shamed and made to apologize to even a young lawyer like Nader. I wonder how far Mr. Nader would go if he was fighting his battles today. I was also very impressed by his use of young people to further the causes of justice. We so badly need youth idealism back on the streets!

    I have wondered how after all of this America or at least the media has not gone back and dusted Nader’s books and works.

    Thanks for starting it 14!

    Comment by Vocalbanker — November 17, 2010 @ 9:56 AM | Reply

  3. Hey Fourteenth,

    I saw this on Huffington and thought you might be interested… BTW: I quite enjoy reading your blog–keep up the great work.

    http://news.yahoo.com/s/huffpost/20101118/cm_huffpost/785315

    Comment by Ty — November 18, 2010 @ 10:23 PM | Reply

  4. Request for Congressional Foreclosure Panel to Examine Foreclosure Lawyers

    http://www.change.org/petitions/view/request_for_congressional_foreclosure_panel_to_examine_foreclosure_lawyers#

    “Although increasing numbers of courts are continuing to reject improper and fraudulent foreclosures, the Congressional Foreclosure Panel examination of mortgage services and foreclosure practices did not include foreclosure lawyers.

    Lawyers are officers of the court; knowledge of applicable laws and civil procedure is not required from mortgage lenders. In states that require judicial foreclosures, lawyers are the ones who file lawsuits to seize and sell property; and lawyers are responsible for filing and recording foreclosure property deeds.

    An investigation could prove helpful to sorting out whether improper and illegal foreclosure proceedings are linked to any self-dealing conduct disadvantaging lenders, investors, homeowners, and city governments. . .”

    Request for fraudulent foreclosure investigationhttp://www.change.org/petitions/view/request_for_congressional_foreclosure_panel_to_examine_foreclosure_lawyers#

    Comment by Barbara Ann Jackson — November 27, 2010 @ 7:11 PM | Reply


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