Some friends of mine who are annoyed about OWS have been asking me “Why are they so pissed off at Wall Street? Isn’t everything the government’s fault?”
It’s called control fraud – google that and you’ll see what’s up. (I owe quite a bit of this info to William K. Black)
We’re in a huge mess – because of loans. Loans that were known to be bad. Bad loans made on purpose. Loans so bad that they had to be chopped up so small as to be unrecognizable.
Some are guessing that 80% of the original “liar’s loans” were not made to home purchasers. But no-one is looking at the underlying loan documents. No manpower. This is by design. So we don’t really know.
In general terms you can call it theft – but what’s really going on is a con on a scale beyond anything in history. You have consolidation of banks, breakdown of barriers between banks and investment houses which allowed banks to use deposits as collateral against their own investments (whoops), you have top management directly contracting appraisers and rating agencies and you have endemic falsification of both the originating loans and reasonable expectation of repayment.
Can you say “perfect storm”? Let’s pile on, shall we?
Sluggish income growth from ’99 on reinforced Greenspan’s monetary policy of making money virtually free. Super low interest rates at the Fed pushes money out of bonds, out of money markets and, worst of all, out of cash reserves and into the equity markets. If the economy had been healthy from ’01 forward, we’d have seen a similar bubble in the stock market. But instead, the stock market stayed relatively flat (instead of declining along with general economic health) and so we saw a bubble in real estate.
So… now we have the rush of money into real estate loans. The problem with that is, as a lender, you can’t make enough on a standard loan with solid collateral… because of the crushingly low interest rate. The ideal would be to have the mainstay of your loan money out on these safe loans and sweeten the pot with risk – “sub prime”. Why were sub-prime loans made? The GOP and others like to blame it on lending to poor people. This indeed happened, but that’s not why we had so many sub-prime loans out there. The main reason is it was the only profitable sector in the mortgage market. They were setting them up either as ARMs that would trigger to a profitable interest rate or just packing an extra point and a half onto the contract in order to close the loan with someone who was not proving their income.
The prevailing hype in the first half of the last decade was the following:
- Housing is a 100% safe investment – it never deflates.
- Inflation in housing is rampant – if you don’t get in now you never will.
- Normal people are becoming millionaires.
- Don’t worry, if a few of these loans go bad we are packaging them with our “safer” loans and these special derivative securities will soak up the losses via loans to other countries (like, for example, Europe) and the equity markets in general.
That brought in the suckers who bought higher than they should have.
But, and this is somewhat speculative because we are not able to see the underlying loans at this point, these loans that were contributing to the inflationary market (easy money = sellers market = inflation) were in large majority made to speculators, and in significant numbers the loans were made to … yup … people that didn’t exist.
Alright then. We have this redhot market. We have a lack of growth potential anywhere else. We have easy cash. We have incentivized markets – loan officers being bonused on the number of dollars out the door – no matter the repayment potential. We have large banks hiring and owning appraisers and rating agencies. I didn’t mention the fact that –
If you have loans out as an asset, FASB standards … strongly suggest … that your outfit have sufficient reserves to withstand the measured likelihood that the loans may be bad. That is, not repaid.
The problem with that is, the reserves appear as an expense. There is no compensating revenue on your income statement. So it looks bad on paper, even though it’s a basic safety measure.
To get around this, banks purposefully double-counted their collateral (using deposits for example) and had their own agencies rate their sub-prime loans as “AAA”. No risk on the books, no reserve on the income statement, giant and totally fictitious profits on the books.
CEO’s get big money – as Black says “They walk away rich” despite the fact that this circumstance is 100% guaranteed to be catastrophic.
Here’s the sickening bit though: The banks are still not booking these reserves. They are using TARP and secret bailout money to artificially inflate their cash balance so they continue to appear profitable.
The nature of hiding your liabilities and expenses is we can’t know for sure by how much…
But the major banks may very well be fully insolvent right now, even with public TARP and other bailout funds in their coffers. They are pretending to “pay back” the “investment” and at the same time appear to be profitable, thus triggering the same bonuses for their top management.
And the whole thing could fail tomorrow.
This is why you can’t elect your way out of this mess. The guy they have in there now has in his cabinet several of the actual people who built this house of cards. He has had a few years to, for example, restart the FBI white collar crime division. But not yet.
A major pissoff in all this is also the fact that there is a law in place compelling the Justice Department to intervene. It’s not that they can do it. They are required to and are not doing it.
So what does one do?
Well… whatever, just so long as we’re not inconvenient, right?