News Item: Survey Reveals Students’ Dishonesty. For those of you who imagined otherwise, high-school-aged youths will shoplift from a store or cheat on an exam. It’s official now. The Josephson Institute, a nonprofit foundation based in Los Angeles , surveyed 29,760 students at 100 randomly chosen high schools throughout the nation. Within the past year, thirty percent acknowledged having stolen from a store while sixty-four percent admitted to cheating on a test. Understandably, all were queried anonymously. The institute’s founder and president, Michael Josephson, expressed dismay at the findings.

I, too, express dismay—that a prestigious foundation would devote time and effort collecting and tabulating data merely to substantiate that youngsters will filch or cheat. During the years I taught chemistry at a community college, not an instructor in my department failed to recognize that, given an opportunity, most students will game the system. We generally concluded that about a fourth of students will cheat without provocation, a full half if an opportunity presents itself, with the remainder refusing to participate. We never knew what portion of the “honest” students abstained simply out of fear of being caught.

But perhaps most disconcerting of all is that Mr. Josephson, immersed in the intricacies of ethics since 1987, is perturbed by the realization that human beings continue to behave as they have for thousands of years. Does anyone with the slightest perception of human nature doubt that deceptiveness and chicanery are built-in instincts? If you witnessed the election season recently concluded, you can retain no uncertainty as to the basic dishonesty of the human race and its institutions.

This gets us into the realm of the nonprofit foundation. Evidently this survey of the obvious, and its publicized results, serves a purpose. It attracts attention. And attention is what the nonprofits must attract. Mr. Josephson’s Thanksgiving Letter, appearing on the institute’s website, explains it clearly: “. . . the simple fact is we are a nonprofit organization and we need financial support to keep doing all that we are. Sadly, our needs are greater than ever in these tough economic times where many sources of our income are drying up.” He concisely sums it up in the final sentence: “This is not intended to make anyone feel guilty, but I do want to be frank about our need and direct my request that you include the Josephson Institute as one of the organizations you support in your year-end giving.”

Let me add a final thought. Operating a charity is a tough racket. Choosing the ones to which you will contribute can be even tougher. Be selective.

In the closing weeks of the election now thankfully concluded, attention focused on the failing economy and a need for the federal government to address the problems quickly and effectively. Amidst passage of the $700 billion bailout legislation, the Bush administration proposed purchase of “toxic mortgages” from major investors as a way to invigorate the economy. As expected, calls for government money emanated from those claiming to represent ordinary citizens, urging assistance for individual homeowners facing foreclosure. This dispute between Wall Street and Main Street remains heated as spokespersons from both sides press their demands.

The latest participant in this controversy is the National Association of Realtors (NAR), whose outgoing president, Dick Gaylord, criticized the U.S. Treasury Department, the overseeing authority, for “focusing too much attention and stimulus money on Wall Street and banks that are in turn using the money for mergers and acquisitions.” Not unexpectedly, the NAR prefers that the effort be aimed more toward direct government support for housing. This is but another salvo in what is currently a national contest by every imaginable group to wrest a share of the largesse. With hundreds of billions to be blown, largely by whim, and the $700 billion only a portion, there’s no limit to the variety of organizations that will haggle over the loot.

This gets us down to a fundamental question: What is the likelihood that upside down homeowners (those whose mortgage balances exceed the value of their homes) will be among the favored recipients? I believe they’ll be out of luck. With no powerful lobbying group truly representing their interests, they are odd man out. In addition, with an estimated 27% of American homeowners now in this predicament, whatever funds remain after allocation to the influential, few dollars remain for these luckless souls. Final result: Wall Street will trounce Main Street.

Are you watching as the nation’s politicians work to solve the financial meltdown of 2008? Though they all have different opinions on what must be done, they seem to agree on one point: hundreds of billions in taxpayer dollars must be thrown at the problem.

The popular phrase of the moment is “bailout” with visions of the federal government buying up non-performing mortgage loans from failing financial institutions. At this point it gets confusing as our elected representatives haggle over the details. What shall we pay for these junk loans? How can we prevent Wall Street fat cats from profiting? Who will supervise the spending of all this money? Will the poor homeowners share in the bonanza? How do we make sure the taxpayer isn’t ripped off?

Amid the furor of the moment, one important question is ignored: Exactly what will the federal government receive as it shells out its money? As a long-time mortgage investor, I’m familiar with acquiring troubled loans. It’s usually a straightforward matter. We’ll take an example. John and Mary Jones purchased their home four years ago with no down payment down and a $300,000 mortgage. They’ve made no payments for the last six months and the bank holding their note is foreclosing. The question becomes, how much will I pay for this loan? What I must know is the current market value of the house—easily determined by comparisons—as well as its probable value a few years hence this takes a little clairvoyance. Let’s presume the property is worth $250,000 today and may possibly drop to $200,000 a few years down the line. On this basis, I’m justified in paying $150,000 for the note, or 50% of its face amount. As its holder, I will try to negotiate a payment schedule with the Joneses. Even at a reduced interest rate, my return will be attractive, and eventual full payoff at some future date will be double my purchase price. At worst, my completing the foreclosure and acquiring the property offers the chance to sell the house for a modest profit. This, in essence, is the heart of the mortgage loan business.

However, this is not the arena in which the bailout is proposed. It’s far more complex. The government will not simply acquire the sort of loan I’ve just described. Let me offer an illustration of the scenario faced. Five hundred loans were packaged together, known as securitized. Some are delinquent, others paying as agreed, and each with its individual terms. Then a ten percent slice of this package got sold off to an investment bank, meaning ownership of a one-tenth interest in each of 500 loans. Finally, this slice was subdivided into two portions, one of which is entitled to receive only the interest payments from the notes, whereas the other receives any principal that is paid. I defy you to figure out what either of these apparitions are worth or what you do with them after you own them.

Nonetheless, the politicos will continue to debate, and harangue, and pose for photo ops, and pretend to know what they are talking about, as they enact legislation that will take the taxpayer to the cleaners.

Welcome to our brave new world.