Moral Hazard, by Kate Jennings, is a book that was published to great reviews and moderate sales in 2002 and then sunk like a stone. You can pick it up for under five bucks now on Thriftbooks, but for a while you could buy it on Amazon for a penny plus shipping. It is the story of a writer who takes a job on Wall Street to make ends meet while her husband is treated for Alzheimer’s. Scenes of the husband’s descent are interleaved with those of the implosion of Long Term Capital Management, told from the perspective of an outsider with ring-side seats. It is brilliant, short, and well worth a read.
(Long Term Capital Management was to the 2008 financial crisis what John the Baptist is to Jesus in Christian mythology. LTCM was a hedge fund based in Greenwich, CT that did highly-leveraged pair trades. It had on its staff, inter alios, the former head of Salomon’s bond arbitrage desk and two guys who won the Nobel Prize for developing the Black Scholes model. When it blew up in 1998, it was bailed out by several financial institutions and the Federal Reserve. The best-known non-fiction book on the subject is called When Genius Failed.)
In economics, the term moral hazard refers to a situation in which there is a lack of incentive for an actor to guard against risk when she knows that she is protected from its consequences. People behave sloppily when they know that someone else will pick up the pieces. Bar patrons pick fights if they know their friends will break them up. Real estate magnates borrow too much when they know that investors and nonrecourse lenders will bear the burden of loss. Swap traders take on big positions when they know that the fed will bail them out. People will play fast and loose with grandpa’s life – legislatures once thought – when they buy a life insurance policy for grandpa.
I recently sold a double-wide in my park in central New York to the new maintenance guy, Marshal. He is a good kid, with a steady job at the local reform school, a baby daughter and a stable relationship with a woman he plans to marry. After the contortions I went through with J.B. and Alex, I am happy to have him. But – he sometimes expects other people to pick up the pieces.
I am other people.
Marshal’s home used to belong to a guy named James Wilk. Mr. Wilk moved in about four years ago, and moved out near the end of 2021. A guy he had been living with, also named Jim, stayed on. When Marshall and I examined the home after Jim-not-Wilk moved out, we found a piano, a leather jacket, a boom box, boxes of CDs and VHS cassettes, a dumpster-full of miscellaneous detritus, some sex toys and a leather boa. I wrote about how those things reminded me of The Sound of Music. After the home was fumigated, Marshal asked me if he could buy it.
Before he asked me if he could buy the home, Marshal asked me how much I wanted for it. I said that I was asking $32,000. The home’s NADA value is $25,000, but NADA values are usually lower than fair market value. ‘Fair market value’, or the price at which an asset would change hands between a willing buyer and a willing seller absent compulsion, is a slippery concept when dealing with illiquid, non-fungible assets like used mobile homes, but homes like Marshal’s, in good condition, sell in the low $40,000s. Marshall does not have a lot of cash saved up, so I told him that, on Day 1, he could pay me whatever the bank would finance, plus $2,000. I would finance the rest of the $32,000 in the form of an unsecured interest-free loan that he could pay in kind through labor any time within the next two years.[1]
A week after we agreed to the deal, Marshal called me. He said, ‘I’m walking through the home now. The whole floor, from the kitchen back to where the washing machine used to be, is rotted out’. I had on my good guy hat, so I said, ‘Go to Lowes for the materials. You can use the park account to buy them.’
A week later, my phone farted again. Marshal said, ‘The roof needs to be replaced. That’s why the floor was leaking. It is all just mush.’ I said,
-How are the trusses?
-We’ll know when we tear it up.
-Get a metal roof. That way, it is one and done.
I offered, again, to help with materials. Marshal said his grandfather knew some Amish guys who did metal roofs. I asked him for a quote. And then, I waited for my phone to fart again. When it did, Marshal told me that the Amish wanted fourteen grand to fix it. Another guy wanted eleven. I felt my throat tighten up and said, ‘Nope’.
-What do you mean?
-I paid seventeen hundred for a metal roofing kit four years ago. I’ll adjust that for inflation and the size of the roof, but that’s the budget. I won’t pay ten grand for labor. In fact, I won’t pay anything for labor. I thought the agreement was that you would fix it.
-I have never done a metal roof before.
-Here’s your chance to learn.
I complained to Dee Dee, the manager of that park, about the mission creep. ‘He’s getting on my tits’, I said. ‘Every time we talk, he asks me to buy him something else. It is getting out of hand.’ She said,
-He does it because it is part of the cost of repairing the home.
-True. But that’s a cost I would like him to bear.
When Marshal asked me to buy him some fasteners that he needed to fix the furnace roof jack to the new metal roof a few days later, I felt like the Incredible Hulk when the final Jenga stick is removed or a pitbull when his ear is tweaked one time too many by a curious child. I did some box breathing and said, ‘I’ll pay for this – but please do not ask me for anything more for your home again. I have more than met you halfway.’ He said,
-But – it’s a cost of putting on the new roof!
-That is a cost that you need to bear. You need to start thinking like an owner.
I could hear his disappointment through the phone line. The goose that laid the golden eggs had upped and gone to California. The gravy train had stopped. But my boundary-setting seems to have worked. A few days later, Marshal went to the bank, I signed over the title, and I have not head anything more about the home.
In every mobile home park where it snows, winter freeze-ups are a problem. Water mains are the park’s responsibility, but residents are required to maintain the water risers that branch off the mains and feed their homes to a point two feet below grade. That means installing heat tape, insulating pipes from the point where risers come out of the ground, and checking the heat tape and the insulation periodically. Every fall, the managers in my parks and I crawl under each home in both of the parks and inspect the water risers and the pits. When we see an uninsulated run of pipe or a grotty heat tape, we tell the resident to fix it. And every winter when it gets cold, I get calls from the managers saying that a water riser has frozen and a pipe has burst. ‘What do I do?’, they ask. I say, ‘Fix it. It is the resident’s fault that it broke, but it is our problem.
-But that’s not fair!
-No, it’s not. But they know that we will fix it. We will be stuck with a huge water bill and a skating rink otherwise.
-That’s bullshit!
-The academic term for the phenomenon is ‘moral hazard’ – but it is the same thing, whatever you call it.
[1] Any failure by Marshal to include compensation income equal to imputed interest on the interest-free loan in taxable income will be between Marshal, the IRS and Marshal’s priest, minister or rabbi.