Should You Feel Guilty About Walking Away?

"I meant what I said and I said what I meant, an elephant's faithful, 100 percent":

Everyone's Defaulting, Why Don't You?, by Daniel Gross, Commentary, Slate: Strategic defaults—...people who could continue to make payments on ... their homes deciding to walk away...—are rising. According to the Wall Street Journal, strategic defaults are likely to exceed 1 million in 2009. This is making some worry about the very future of capitalism. Georgetown University business ethics professor George Brenkert told the Journal that borrowers who can afford to stay current are morally required to do so, and that were Americans to conclude they could just walk away from obligations, it would be disastrous. ... Megan McArdle expressed disdain for people who chose to indulge themselves on consumer goods and services while not keeping current with their mortgages.

Um, do any of these people read the Wall Street Journal? Strategic defaults are the American way... Deep-pocketed companies, billionaires, and institutions that can afford to stay current on payments strategically default all the time.

Morgan Stanley, for example, is a gigantic corporation. As of the second quarter, it boasted total capital of $213.2 billion. It certainly has the ability to make good on obligations... But earlier this month Morgan Stanley said it would turn over five San Francisco office buildings to lenders rather than pay the debt on them. Why? ... "This isn't a default or foreclosure situation," spokeswoman Alyson Barnes told Bloomberg News. "We are going to give them the properties to get out of the loan obligation." Smells like a strategic default to me.

It's not just happening in real estate. According to Standard & Poor's, through Dec. 18, 262 corporations had defaulted on bonds they had sold to the public, twice the total of 2008 and "the highest default count since our series began in 1981."... Sometimes companies default on these bonds because they're broke (see: Lehman Bro.). But sometimes they simply default because they don't want to pay out for them. Investors and managers, who have spent hundreds of millions of dollars on personal toys, aircraft, headquarters buildings, and compensation, simply can't seem to find the cash to stay current on debts. ...

There's no doubt that homeowners are defaulting strategically. And the surprise may be that, given market conditions, there aren't more strategic defaults. A paper by University of Arizona law professor Brent White suggests that bourgeois values are actually keeping people from walking away from bad home loans. Most people underwater on their mortgages stay current "as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure's perceived consequences." In addition, he notes, societal norms push individuals "to ignore market and legal norms under which strategic default might not only be a viable option, but also the wisest financial decision."

Of course, corporate managers and financiers don't suffer from these neuroses. Do you think billionaire investor Sam Zell feels any guilt or shame because his buyout of the Tribune Co., which had $12.9 billion in debt, ended in a Chapter 11 filing...? Rather than worry about whether Americans will take cues from modest homeowners who make a tough decision not to stay current on debt, perhaps we should worry about middle-class Americans taking cues from billionaires and Fortune 500 companies...