Taking Stock of Bonds

June 23, 2008

What Would Carlin Say About Subprime?

By now most of us have read the obituaries and praise for George Carlin. We will recall the nasty bits about his vulgar tongue and testing free speech. But, there were also his many wonderful observations about how, in a modern age, we have managed to distort the meaning of words.

A Carlin monologue on language asks how toilet paper became "bathroom tissue" and planes nearly colliding became a "near miss." In our modern age we try not to offend so we camouflage true meaning with meaningless words or phrases. Carlin found that sort of Orwellian "newspeak" offensive.

You expect it from advertising agencies, but you don't want it in everyday vernacular.
 
What would Carlin have thought about subprime mortgages, specifically the word "subprime?" Initially, the word defined loans to risky borrowers--those with low credit scores. Subprime later was used as a term for first-lien mortgages, home equity loans and home equity lines of credit. If you own second lien paper, you know there is a big difference because losses in second lien loan pools have eaten at AAA-rated classes. It does not pay to go after the borrower if you're a second lien creditor.
 
The word "subprime" -- now on the lips of every would-be regulator and politician -- means nothing because over the past several years the phrase was used so often that it veiled the true dangers of sloppy underwriting and aggressive lending. Kind of like that near-miss in an airplane.
 
Subprime. Sub prime. A piece of steak undercooked or overcooked? Or is it from a bad bit of cattle? Does it trade with cattle futures in Chicago? No, it's actually a bad loan. A bad home loan or a bad home equity loan? We're not sure. Why? We lumped them into a pool. What's in the pool? We don't know. It could be a first lien or second lien. All we know is its subprime.
 
Naturally Carlin would have said it better.