The biggest financial scandal in American history is going on entirely unacknowledged by both campaigns, but especially by the Democratic party which is supposed to be the guardian of the little people against Big Finance.
The biggest financial scandal in American history is going on entirely unacknowledged by both campaigns, but especially by the Democratic party which is supposed to be the guardian of the little people against Big Finance.
Reminds me of watching my step father feed the cows. They all line up as soon as his VW drives down the road. He puts the hay in the trough and then puts the supplements on top of the hay, walking on top of the fodder as the cows are chewing away around his feet. As soon as he gets done walking out of the trough, one or two jokers clamber [i]into the trough themselves[/i] to get a better angle on the tasty supplements. Eventually two hundred cows are fed and they all walk away back to the pasture.
But some feed better than the others. My step father figures that over two years, it will all equal out anyway. But those are cattle, and this article is about bankers, who don’t equal out, do they?
It is a scandal, but I think it’s incorrect to lay it at the feet of the hedge funds. Those who deserve the blame are: 1. the Realtors, who were all too happy to sell overpriced homes to buyers who the Realtors knew couldn’t afford them 2. those same buyers, many of whom were happy to fudge data on their loan apps, so that they could qualify 3. the loan officers, who were willing to ignore false financial information, so that they could make the loan (and get the commission for having done so).
If someone incurred a huge amount of credit card debt, would we think it makes sense to bail him or her out? Of course not. Yet the federal government (which of course ultimately means we, the middle-tax taxpayers) are shouldering the burden of this mess, either directly (our taxes will be increased, despite Obama’s promises) or indirectly (our 401ks, 403bs, and IRAs have taken a huge hit because of the dent this mess has put in the stock market).
I think there’s a lot to what you’re saying, Sophy. I read [url=http://captaincapitalism.blogspot.com/2007/12/banking-christmas-carol-part-2.html]this horrifying account[/url] of creeping fraud a year ago, and it’s stuck with me since. Personally, I wouldn’t mind if these people were all put in front of juries.
[blockquote]And then I realized what was happening. Jimmy was new. And in being new he foolishly held onto some romantic notions of running a good business, making good loans and doing what was in the best, long term interests of the bank. He, like I did before, somehow thought that efficiency and profitability were the primary goals of the bank. That the bank existed to make a profit. And that because of this, management would presumably prefer to avoid bad loans. In other words he didn’t understand the true business the bank was in. That it was not there to make a profit, serve the shareholders or conduct good business, but that it was there first and foremost as an employment vehicle for castes of senior managers and bankers. That profit and efficiency were truly secondary, if not a complete ruse. [/blockquote]
The democrats are the party of government, which means they are the pre-emininent party of corruption, for when it comes to corruption and graft business will always take the back seat to government and all her sisters like unions and semi private “businesses” like Fannie and Freddie.
Continuing…
[blockquote]Two, another problem is that by selling their loans on the secondary market it eliminated any risk to the originators of the loans. If a bank or mortgage company was not going to hold onto the loan then what did they care about the probability it would be paid back? They would get their commission and closing costs, turn around and sell it on the secondary market, approve a new loan and do it all over again. Unfortunately this effectively made the banks and mortgage companies brokers and provided them with a great incentive to focus on volume and not quality or risk. It was no longer about making good solid loans that were very likely to be repaid, but to go for volume, rake in the commission and fees, and then jettison the risk to an unsuspecting investor. It boiled down to a game of hot potato.[/blockquote]
An interesting anecdote, Tom Roberts, and, I think, very applicable.
Very enlightening indeed, Jeffersonian, if also creepy – thanks for sharing that link. I think that I would go with the 15th or so commenter on that thread: [i]”The banks which misrepresented the risk and return upon reselling the loans were committing fraud, and thus should be held liable for the losses incurred by the secondary investors.”[/i] Also, too many of the realtors, buyers and loan officers that get trapped in these fraudulent bank transactions don’t really know where the boundaries are – though of course some will have knowingly transgressed boundaries – and it’s because they are never properly trained for their jobs or tasks, which is the responsibility of the employer. Even home-buyers are often learning on the fly, by trial and error, unless they have really good advice and guidance from parents or other mentors.
The author needs to read history instead of trying to (re-)write it. The derivatives that are now blowing up were created in the 90’s. What is chilling is that some insiders have stated privately that they knew all along that everything would blow up. But they had already planned that they would have gotten out with bags of money.
There are plenty of additional factors:
1. Loan originators are generally financially incompetent. There are no education or training requirements to originate residential loans. The vast majority of originators have no financial or professional degrees.
2. Lenders took advantage of #1 by allowing originators to make up to 5% for putting their customers into Option ARMs. Too much temptation for the babes to resist. Massive fraud and misrepresentation in selling those loans.
3. Lenders like WaMu and Countrywide incredibly wrote 20% 2d mortgages behind 80% 1st mortgages, sometimes with no income documentation.
4. Lenders like Countrywide entered into incestuous partnerships with builders like Kauffman and Broad and are now accused of phony appraisals just to move home sales.
Amid all of this, everyone seemed to forget that real estate is cyclical. So there was plenty of greed and fault to go around. But everything was in place well before the current administration.
The sad thing is that because of the ripple effect and the fact that we live in a fallen world, even people who were honest and prudent will suffer from the actions of greedy or dishonest people.
Unfortunately, Fannie and Freddie were Democratic strongholds and people like Franklin Raines are big Obama supporters. So both parties have a stake in covering things up. If people really understood the reasons for, and consequences of, this implosion, they would be in the streets with pitchforks.
There are several interesting and important side stories here, each of which could be expanded to a few pages.
a) Adjusted for inflation, the previous peak in real estate prices was in about 1890 (yes, 18-90), and once that bubble deflated it took a century for prices to recover to previous levels. That phenomenon was generally worldwide.
b) All bull markets end when there’s no-one left to buy. Greedy bankers, ignorant or complicit regulators, over-confident customers, and America’s political class (Rs pushing “ownership society†and Ds pushing “social justiceâ€) all had short-term benefits arising from continuation of the bubble. It was destined to fall apart once houses became unaffordable to new buyers in spite of every goofball financing trick known to man.
c) Life-cycle demographics are now profoundly negative for real estate. Single-family house purchases peak at about age 47. Baby Boom births peaked in 1958. Do the arithmetic. Numbers of people in their peak house-buying years will continue to decline into the mid-‘20s. The only bright spot will be starter apartments for people in their early 20s.
d) The mortgage market, particularly Fannie and Freddie, was the primary pathway by which the Federal reserve increased the “money supply,†which really means “credit supply.†That game is over. It will henceforth be quite challenging for the Fed to attempt to re-flate the bubble by ‘printing’ money. That’s a very deflationary development.
e) Dealing with debt, whether by repayment or write-off, is also profoundly deflationary. Because the “money supply†was increased by increasing debt, it will be [i]decreased[/i] by eliminating debt, no matter how that is done. As my grandfather used to say, “Every debt is eventually repaid, either by the borrower, or by the lender.†To which we (unfortunately) must now add the taxpayer, because …
f) Government intervention was not optional in the current situation. The alternative was a complete freeze-up of worldwide credit markets. For keeners, the LIBOR spread was already at near-record levels, meaning banks are fearful of lending to other banks because nobody knows who’s sitting on the toxic waste, and nobody knows who’s the uncovered counter-party in the $100 Trillion or so of derivatives floating around.
g) If credit markets freeze up, and they still might, there will be a scramble for liquidity the likes of which we haven’t seen in generations. Businesses will collapse as normal lines of credit are closed. Good loans will be called.Foreclosures will soar. Cash will be king, and those without cash will be desperate – be they a bank or Joe Six-Pack. Did you know that your mortgage can usually be called on 90 days’ notice just because the bank feels like it?
h) When goods and services are chasing cash … that’s deflation. Because deflation punishes debtors it feeds on itself through liquidation of everything in a frantic attempt to meet obligations. The one really bright spot, however, is that deflation usually also increases real wages because (for those who still have a job, and even in the ‘30s Depression 75% still had a job) wages fall much less than prices, so their purchasing power increases.
For us as Christians we need to be prepared for this type of thing. There will be lots of people needing assistance: food, clothing, shelter, and so on. We’re unlikely to see an exact reprise of the ‘30s, but it will be challenging.
Government won’t be the answer – they’re as insolvent as a lot of people and companies – so caring for the “least of these†is likely to fall more heavily on Christian shoulders than it has done in a long time.
The best we can hope for is that things such as the Fannie & Freddie bail-out will purchase enough time to cushion things on the way down. If we can get a PPSSSSSS over several years it will be vastly preferable to a POP. Nevertheless, we need to prepare for more difficult times and greater needs.
What went on at Fannie and Freddie was considerably worse than Enron. It remains to be seen whether there will be the same sorts of prosecutions, for the simple reason that Fannie and Freddie have generally been Democrat enterprises with strong Democrat friends (Dodd, Schumer, [i]et al.[/i] in Congress.
Regardless, the financial world is profoundly different than it was a week ago. The problems have been there for years, waiting for a trigger. This may well have been it.
[blockquote]The author needs to read history instead of trying to (re-)write it. The derivatives that are now blowing up were created in the 90’s. What is chilling is that some insiders have stated privately that they knew all along that everything would blow up. [/blockquote]
Derivatives were indeed The Big Thing in the ’90s, but derivatives themselves are not the problem. If the products within a particular derivative have been accurately assessed for risk, then individuals and institutions can calibrate their investment portfolios accurately. The problem comes, as the link I provided illustrates, when the originating institutions knowingly fudge the risk and then sell the product off under essentially fraudulent terms.
I agree completely with the commenter #7 cites: These people need to be sanctioned for their fraud. Whether that means prison, fines, restitution or a combination of all three, I’ll leave that to the wheels of the legal system. Even if all aren’t prosecuted, the image of lots of these mountebanks’ lives being ruined will surely inspire others to restrain their urge to repeat the infractions.
I don’t agree, Jeffersonian, that misrepresentation of derivatives was the problem, although there was clearly some of that. Many derivatives were and are “level 3” assets, incapable of valuation, the toxic assets referred to by Bart Hall in 11f. For example, let’s take item #3 in my comment 8. When Countrywide and WaMu wrote the 20% 2d mortgages behind 80% negative amortization 1sts, they might write credit default swaps or they might slice those 2ds into packages of e.g. the top 10% (i.e. 90-100% cltv) and the next 10% (i.e. 80-90% cltv). The problem was that there was no reliable way of estimating the default potential of either group. If the quality of the packages was then misrepresented that would make a bad situation even worse. But I understand that Countrywide and WaMu (and others) are still sitting on massive amounts of this toxic waste, and it is unclear how much of the risk has been laid off on others. The markets apparently think not enought to save either.