The Strategic Default | When Billionaires Walk, Millions Talk

Strategic Default

The Morgan Stanley Building in Time Square, NYC (Image from jimyi, Flickr.com)

The Morgan Stanley Building in Times Square, NYC (Image from jimyi, Flickr.com)

As a corporation, Morgan Stanley can only be termed as gigantic because at the end of the second quarter, they had assets in the area of $213.2 billion. Here was a company that was good enough to meet any of their obligations made by its operating units. Morgan Stanley, however, defied logic by announcing earlier this month that they would turn over their five buildings located in San Francisco to their lenders, rather than pay off the debt on them, which is also known as a Strategic Default. If any homeowner who had borrowed money on their home and taken the same option on this, they would have been reminded about their moral obligations of meeting their debts rather than just walking away. Does this sound fishy? Well, if fish could ever walk the street, even they would say that there are two sets of laws: one for the billionaires and the other for the masses.

Why Did They Do This?

Morgan Stanley had paid top dollar for these commercial properties during the huge real estate boom in 2007. Two years down the line, the market crashed and Morgan Stanley could no longer afford to hold on to the buildings. The prices of the properties had gone with the wind and tenants were hard to come by, yet they had not faced any foreclosure or defaulted on any repayments. They had enough money to meet all necessary payments, but they just chose to walk away from the properties, returning them to their lenders. They used a slang especially created for the situation called a Strategic Default. The moral obligation that applies to millions of Americans did not apply to Morgan Stanley, who just walked away from their obligations. What they left in their wake were millions of Americans talking.

Uneasy Future

Millions of Americans took out secured loans or borrowed money on the equity of their homes, and have done so on new homes as well as previously owned homes. They are perfectly capable of meeting all their obligations, and have not foreclosed or defaulted on their loans. However, if these people chose the strategic default option and returned the properties to their lenders, a tsunami of disasters would soon follow. People who had borrowed money did so when prices of the properties were high. They would be walking out of a debt at a time when prices have plummeted, preferring to treat the money already paid as a loss. However, this would probably be lower than facing a foreclosure.

Can the average person have the same option? This cannot be an option, as they just do not have the financial backing to get the same privileges as the filthy rich have. They are, after all, part of the millions that are only supposed to talk. They do not have the authority to walk like the billionaires and are obliged to meet their moral obligations. Banks and lenders may just be quivering in their seats wondering what they can do if a situation like this came up on them in the near future. It will be the specially anointed billionaires who will have to listen.

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