High time for less fine print and more clarity

The Baltimore Sun

Can you blame Wall Street for being confused? Each mortgage security polluting our economy often holds hundreds of loans from dozens of states.

Loans got bundled into layers according to default rates and repayment schedules, each batch dependent on what happened in the others.

In case that wasn't squirrelly enough, Wall Street bought and sold insurance contracts whose values were ultimately tied to different parts of the unfathomable mortgage pool.

"I'd like to know what those damn things are worth," Federal Reserve Chairman Ben S. Bernanke said a year ago this week.

Wouldn't we all.

Whatever happens next, Bernanke's words are our new motto. Not just for mortgage bonds. For mortgages. For credit cards. Insurance and annuities. Automated teller privileges. Utility bills and rent-to-own plans. Payday loans. Cable and wireless contracts.

Let's simplify transactions of all kinds so buyers and sellers can really, transparently see what they're worth.

Enough with teaser rates and mortgages whose principal balances get bigger with time.

Enough with banks that process big, balance-busting checks first so they can charge overdraft fees on little checks that post afterward.

The heck with expiring frequent-flier miles and credit-card rates that soar when you miss a payment. No more nuisance fees. Down with weasel clauses and booby traps.

Obfuscation usually works against consumers and for business. But corporate America outsmarted itself with 21st-century mortgage bonds and derivatives.

Bernanke didn't know what the things were worth? Neither did the geniuses who created them or the chumps who bought them.

Wall Street defended the complexity as a way to spread investment while distributing the risk of default.

"As is generally acknowledged, the development of credit derivatives has contributed to the stability of the banking system by allowing banks, especially the largest, systemically important banks, to measure and manage their credit risks more effectively," then-Federal Reserve Chairman Alan Greenspan said in 2005.

Hoo boy.

What Greenspan and everybody else forgot was that healthy economies and efficient pricing don't work without good information. Free markets are great, but information failure is a well-recognized form of market breakdown.

Somebody buying insurance tied to a contract tied to loans scattered from Laurel to Las Vegas did not have good information. Neither did the unsophisticated buyer whose real estate agent told him he could afford a starter mortgage payment that was 40 percent of his income.

Mortgages are the worst development of a decades-long trend.

Consumer contracts of all kinds have left regulators eating dust. Credit-card disclosures take thousands of words to say the company can charge pretty much whatever it wants. My car insurance documents are indecipherable.

It has been 40 years since Congress passed the Truth In Lending Act, which made companies stop lying about interest rates. We need something similar to bring new simplicity and clarity to all kinds of transactions.

Some reforms might involve removing consumer choice altogether.

I suspect consumer electricity will eventually be re-regulated, relieving people who are tired of shopping for credit cards, cell phones, landline phones, bank accounts and cable contracts of at least one decision.

Some will involve better regulation of existing choices.

There is much talk of protecting people against credit card, auto loan and education loan abuse, not to mention mortgages. Harvard law professor Elizabeth Warren has proposed a Financial Product Safety Commission that would be similar to the existing agency for kids' toys and the like.

All this would come under the umbrella of consolidating regulators, boosting capital requirements and extending civilization to hedge funds, derivatives and other untamed parts of the jungle.

Is there a chance Congress will go too far? Absolutely.

Can you and I probably cope perfectly well with mortgages and credit cards as they are? Sure. But many others haven't. When that happens, we've learned, it blows back on everybody.

The large print giveth, and the small print taketh away, says singer Tom Waits. Time for more of the former. And a lot less of the latter.

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