18 April 2010

A Modern Tale of Financial Loss

A developer (Goldman) built houses that looked well built, but were in reality designed to be firetraps, using plans provided by an architect (Paulson). They were sold as conforming to code with certain characteristics represented and endorsed by the building inspectors (Ratings Agencies) and overseen by fire inspectors who did spot checks (the SEC).

After the sale, the developer and the architect bought huge amounts of fire insurance on the homes from a friendly insurance agent (AIG London) who was eager to collect the commissions. The amounts that were insured were sometimes well in excess of what a home might actually be worth. They even took out policies on nearby homes that they had not even built or sold.

The developer had also encouraged the city government to allow the firetrucks and safety equipment to fall into disrepair, and for too few inspectors to be hired to do spot safety checks. So when the houses inevitably burned, the fire department was unable to adequately respond. The fires became so bad that they destroyed entire neighborhoods and threatened whole sections of the city.

The developer and architect were able to submit their insurance claims for sums that were so staggering that the insurance company for which the London agent worked was itself facing bankruptcy. This would have placed at risk the holders of its other policies in completely unrelated areas such as life and auto insurance, and retirement annuities.

So the developer had government people, whom he had helped to elect, provide government backing for the insurance company, for the good of the public. The people who had lost their homes and those who were forced to help to pay the developer were very upset.

But the developer was a large advertiser in the local newspaper, and a old school friend of the owner, so it ignored the complaints, and reported on the story from every perspective except what had really happened. It blamed the people who had lost their homes for being foolish and not inspecting the homes more closely, and taking the developer and the housing inspectors at their word, and trusting the fire departments and its inspectors to do their jobs.

And anyone who complained too loudly was at first ignored, then ridiculed, and finally threatened with arrest. After all, the developer was one of the most important and influential people in the city, and had many powerful friends. Any suggestion that they had done anything wrong was simply unbelievable.

After all, it is inconceivable that an upstanding member of the commuity would ever endanger so many people's lives and homes like that just for personal profit.

The End (for now)