More Punishment Less Revenge
By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Thursday, 7 August
2008, 7.50 am and 7.20 pm)
One year after the subprime crisis began and even
after massive losses have been registered, global financial
markets remain fragile. It’s anyone’s guess when this will
One thing is certain though. The legal battles are
beginning. In the US, investment banks and ratings companies
are being sued by investors bent on recovering their losses.
Investors are also suing to take revenge. This is because they
can’t accept that their investment bankers get to keep their
fat bonuses and salaries.
As the legal battles step up, we will hear contrasting
accounts of who is responsible. Angry investors will surely say
that the crisis could be avoided if ratings companies and
investment banks had been less greedy and more
In their defense, the investment banks will surely say
that they were only responding to investors’ greed. They will
also argue that US policy makers were at fault.
In the end, no one will be wiser. It would be like
listening to the two contrasting versions of the quarrel
between a husband and a wife. There is “her” version. There is
“his” version. And there is the truth. Unless we share the same
bed as the divorcing couple, we will never know precisely who
did what to whom.
Even if the culprits of the credit crisis can be
identified, American mortgage borrowers will continue to bear
the losses on their homes. Many say they are the real victims.
But these victims are striking back.
Because more and more US borrowers are walking away
from their homes after returning their keys to the lenders. All
the lender can do is to try and sell the house and recover some
money. But he can’t go after the borrower for the outstanding
This is because a legal quirk originating in the Great
Depression of the 1930s makes it almost impossible for lenders
to pursue the borrowers. If all US mortgage borrowers walked
away at today’s prices, the losses for the lenders would go up
by another US$1 trillion. This will upset global markets
Certainly, by walking away from his home, the American
borrower will have his credit record sullied. But unlike his
Singapore counterpart, who will be made a bankrupt, the
American can still keep his job and carry on a normal life. In
five years’ time, his bad credit record will be
Since the 1930s, not many Americans have walked away
from their homes like this because of the social stigma
attached. But this is changing because the stakes are high. It
all boils down to one factor. The punishments for defaulting in
the US are not strong enough.
Economists have always believed that strong state
punishment is essential for both parties to stick to a
contract. Strong state punishment also helps to create trust.
And when trust exists, it’s easy to develop an efficient market
Last month, a paper published by economist Naci Mocan
of the Louisiana State University demonstrates this connection.
Mr Mocan’s research looked into the types of situations whereby
revenge is most likely.
He found that revenge was very strong in countries
with low levels of income, low levels of education, a weak rule
of law, and where people have experienced war and racial
Mr Mocan’s research reinforces the belief that when
state punishment is strong, individuals’ revenge will be weak,
and vice versa.
Because US mortgage borrowers feel that the US legal
system will not punish those who have cheated them, they are
probably taking their revenge by walking out of their
There was a time when buying a house in the US was
like entering into a marriage. It was a commitment for life.
Now that state punishments are weaker for both loan default and
divorce, the new attitude must be: “if something better comes
along, just get out and make the switch”.
By the way, if you are mediating for a divorcing
couple in a country where state punishment is weak, tell the
husband this. Mr Mocan’s research also found that among groups
of people, the most vengeful are women.