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Step one: Take wooden block from the tower base and place it gently on top. Hold breath and wait.

Step two: Take turns repeating step one until tower wiggles, wobbles, and finally comes crashing down. The last one to stack a block without making the tower fall is the winner.

So what are the rules to this edge-of-your-seat game? It seems that there are no real meaty rules.The closest rule book that we could follow would be that of hot potato ? pass it along to others so that you are not left holding the scalding vegetable. If you are left burn free, you win.

Players for this game have far exceeded the JengaŽ recommended ages of 2 to 4. We have home buyers, sellers, brokers, appraisers, title companies, subprime lenders, investment banks, mortgage associations, insurance companies, investors, the Feds, ratings agencies, the FBI and the list is still growing.

By no means do I even want to attempt to untangle or interpret the "sophisticated" correlativity of exotic financial instruments embedded in this game such as collateralized debt obligations, pay option ARMs, and credit default swaps. But I do want to examine which basic blocks and what fundamental moves made this loan tower tumble down.

As I see it, this tower was teetering on three pillars or beliefs. Pillar One was that house prices always increase. Pillar Two was that default rates are predictable. Pillar Three was that you can indeed get something for nothing.

So how did these pillars stand up? Let's see. U.S. home sales and prices took the steepest plunge since 1989 and approximately one in every 500 U.S. households is now in foreclosure.

Pillar Three, built from wood of the elusive money tree, stood atop the myth of free money propagated by lucrative incentives and watered-down loan underwriting standards now lovingly known as NINA (no income, no assets), NODOC (no documents) and NINJA (no income, no job, no assets) loans. At this point, I could scold the slick brokers and predatory lenders but there is quite the line-up before me waiting to give them a thrashing.

But are we not forgetting a few players here? What about the borrower? Dare I suggest that they may bare some responsibility? Could they be hiding behind a convenient veil of ignorance? Provided that lenders did not engage in force or fraud, borrowers still have responsibility for their debts detailed in legally binding mortgage contracts.

Also, whatever happened to the notion of living within our means? And what of the "predatory borrowers" who have treated their homes like bottomless ATM machines? Is it possible that borrowers played the market, disregarded the risk and simply lost the gamble?

In the name of moral hazard, if we are to play the game, all players who make risky choices must regretfully suffer the consequences.

JOANNA MAKOMASKI, the former risk manager for a global energy company, is a leading specialist in innovative Enterprise Risk Management methods and implementation techniques for ERM Quickstart. She writes on risk management.

November 1, 2008

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