04/27/2010 05:12 am ET Updated Dec 06, 2017

Chris Dodd on "Jingle Mail"

Late last year, Morgan Stanley, in essence, defaulted on a 10-digit mortgage debt they were carrying. They looked at a tanking commercial real estate market and realized they'd never get the return they assumed when they ran the numbers before borrowing the money to purchase the buildings. They made a business decision, mailed the keys to their creditors, and walked away from the deal when it soured for them.

Soon afterward, in New York City, Tishman Speyer Properties and BlackRock Realty returned one of the country's largest apartment complexes to its creditors under similar circumstances. They had purchased the property for $5.4 billion; today it's worth only about $1.8 billion.

In both these cases, contracts were signed. One could say that both Morgan Stanley and Tishman Speyer Properties/BlackRock Realty took out real estate loans (or mortgages) and promised to pay them back. When they mailed their creditors the keys and walked away from their promise to pay, one could say they broke their word, right?

Well... In a word: No.

You see, the contract they signed provided for exactly what happened. The money they borrowed was secured by the properties. If they failed to pay, the creditors got to keep everything they had paid to that point, and they got the buildings. In these cases, you can be pretty sure that the borrowers were "under water"; they owed more on the properties than they could possibly hope for in an open market sale (added to the equity, if any, they already had in the properties). After all, if their equity plus the sale price exceeded what they owed, they'd be better off selling and keeping the difference.

Why do I bring all of this up?

Well, because right now, hundreds of thousands of home-owners are under water. In late 2006 they bought a house for, say, $250K with nothing down. They have an exotic mortgage - let's say they bought the house with a "balloon mortgage" and their payments were pretty low for the first three years, but have doubled in the last month or so. Let's say they bought their home in Las Vegas or Arizona - markets that have been hit especially hard by the real estate bust. And let's say a home identical to theirs, right next door, was sold yesterday in a foreclosure sale for $130K.

Why in the world should these homeowners pay that mortgage? After all, their debt was secured by the property, just like the commercial cases cited above. In most cases, they'd be fulfilling the terms of their contract by mailing in the keys and walking away from the house. In fact, by doing this, they'd save almost enough money to purchase the next house that sells in a foreclosure sale - perhaps even the one they're in!

A word of caution: none of this is legal advice. Talk to a lawyer, accountant and financial advisor before considering this route. In some places (but not most), mortgage-holders are allowed to seize property above and beyond the real estate that secured the loan.

The point I'm making here is that we only hear about "moral obligations to pay debts" in the context of consumer conditioning. Such nonsense doesn't apply to big business.

The John Galts on Wall Street don't constrain themselves with morality considerations; they look at the numbers with lizard-eyes and make the decision that ensures the number at the bottom of the page is as big as it can be. An ugly truth is that corporate law establishes a fiduciary responsibility - corporate decisions must be based on the what will return the largest profit to shareholders. If that means welshing on a debt, then welsh they must.

I personally believe it is time for consumers to understand that they have a similar responsibility to themselves and their families. If faced with a choice of enriching a bunch of lizard-eyed bankers or putting their kids through college, I hope more Americans do what is best for them and their family in the long run.

I asked Chairman of the Senate Banking Committee Chris Dodd about this earlier this evening (I mistook JP Morgan for Morgan Stanley, please forgive the error). As Chairman of the Banking Committee, he was careful about what he said, but what he said was sensible: talk to counsel and determine what is best for you.

Dodd's response may very well send shock waves through the banking community. Wall Street's biggest fear is that the cultural norm of "pay your mortgage (and other debts)" falters. But, as I said, bankers and other businesses walk away from sour deals all the time. If it makes sense for you, you should learn a lesson from the "Masters of the Universe" and do the same. Just be careful and, at a minimum, consult a lawyer that can walk you through the costs and benefits first.