D1

Roger Haineault

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The U.S. economic meltdown is a lot like a train wreck: - you hope no one is hurt, but you're amazed at the destruction.

I didn't think it was possible that I would take another shot at the American economy this week, but it's nothing short of amazing to watch it from the cheap seats.

The whole point of a free-market, capitalistic society is effectively survival of the fittest. Companies develop, find their business niche, grow and prosper, and eventually become takeover targets or acquire others. Conversely, they fail and pass into the inky black of the night.

At the end of the day, the customer is responsible for making the right buying decision, and if not, he or she must suffer the consequences. That's just the way it is.

The business, on the other hand, has to conduct its due diligence. It must determine what will be needed and price the product accordingly. It needs to employ people who understand the mission and will operate to serve the customer while keeping in mind the company's requirements.

If this basic tenet isn't met, the company goes out of business and the employees join the ranks of the unemployed.

In the U.S. and the byproduct global markets, the economy is being torn up primarily for one reason, no matter what other commentators say - the subprime mortgage market and its facilitating players.

In Canada, the vast majority of people who need a mortgage are so restrictedly qualified that foreclosure is a rarity.

First, for the most part, a lender wants the borrower to have some down payment, putting the homeowner with some skin in the game (although for a while we were creatively leaving this concept).

Second, they want the property to stand on its own as collateral. So independent, qualified appraisers are hired to provide the lender with an objective opinion as to what the house is really worth. The bank then lends less than that amount, and if the loan needs to be greater, an ancillary insurance policy is taken out to protect the lender.

Finally, not only does the buyer need equity and the home needs to have independent proof of its worth, the buyer also must undress their fiancial history and beg.

They need to have demonstrated competency with credit. The must prove how much they make by furnishing assessed tax returns. Any investments are duly noted, as are any liabilities, to see if the debt can be serviced. Third-party credit agencies are polled to see if there are any hidden risks.

For many American homeowners, the process is similar. But for the subprimes, it's in the best interest of everyone to mislead the ultimate provider.

The buyer wants a nicer home whether he or she can afford it or not. The initial underwriter is paid a fee on the size of the loan. The supporting players are offered inducements for putting the deal together.

The false assumption that real estate always goes up in value is trotted out as the ace in the hole. The credit rating agencies, which are compensated for their opinion, say that the financial institutions that package these mortgages into investments are worthy and so the investment is worthy.

No one is accountable. Everyone who should have been protecting the lender was operating at cross-purposes.

And now when the market should act by allowing companies to falter and to allow the system to root out the fraud, the U.S. government has stepped in with a $700-billion bailout.

While there was probably no choice, it's almost sickening to watch. If you can believe it, there are now concerns that people who have mortgages may watch to see if their lender stumbles so that they can default, and let the government step in and pay.

And regulators have banned the short-selling of a bunch of stocks - a completely legitimate enterprise, and part of the function of the stock market.

But without the financial support, consider the following apparently unrelated scenario. Without providing this liquidity to the market, it could happen that an automaker loses its ability to borrow.

If buyers can't finance a car purchase from the manufacturer, they would need to find the $30,000 to buy the car some other way.

Fewer cars end up being sold, increasing inventory. Full lots mean that production is cut. Less demand means workers are laid off.

Out-of-work autoworkers can't pay their mortgages and lose their homes. More foreclosed homes on the market depress real estate prices, forcing other people to walk away from their commitments. Yes, it's vicious.

So while opinions on the necessity of the bailout is divided, one thing is certain. At least in Canada, this style of event happening is practically non-existent. And our financial institutions are inherently extremely solid - they make a billion dollars in a quarter of the year.

However, their share prices will be volatile through the end of the year as a result of the global jitters. This means there are going to be tremendous opportunities to be had.

The old axiom has never been truer - buy when there's blood on the streets.

Roger Haineault is with Help 4 Taxes. He can be reached by e-mail at roger@help4taxes.ca or by calling 443-HELP (4357). His column appears Mondays.