Bad Banking Practices: The U.S. Vs. The World

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 |  Includes: BCS, C, DB, GS, JPM, MS, RBSPF, UBS
by: Dave Landry

Anywhere there is money, there is bound to be corruption. And in any country where there are banks, some of those banks are almost guaranteed to engage in bad banking practices.

While it was discovered in 2002 that the Australian banking community was involved with Low Doc Loans used for Sub Prime lending, a finding that continued on to Great Britain and Ireland, it took six additional years to find the same had been occurring in the United States.

And how was that discovered? Most simply and directly by the 2008 American economic collapse, which resulted in a crash so widespread and impacting, it was difficult to not see who the culprits were, culprits some say, tally a list anyone worldwide would recognize from the American financial scene: Bank of America (BML-G), Citicorp (NYSE:C), Goldman-Sachs (NYSE:GS), JP Morgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS) and Wells Fargo (WFC-Q), as well as offshore interests such as Barclays of the U.K. (NYSE:BCS), the Royal Bank of Scotland (OTCPK:RBSPF), Credit Suisse and UBS (NYSE:UBS) (Sweden) and Deutsche Bank (NYSE:DB) (Germany).

In specific, these institutions in lieu of their other fraudulent lending and borrowing techniques, engaged in mortgage and foreclosure abuses much like was done in Australia. To put it shortly, leading up to the crash, subprime lending was at an all-time high. People who truly coudn't afford a home were still coaxed into doing so by way of low interest rates which masqueraded themselves as supportive of the American dream.

Well, in the end, many Americans fell for that dream, then fell hard once the dream ended. Now as has been shown by their portfolios and the continual shifting around of assets from one supposed safe haven to the next, it simply seems with American investors that the dream, there ever was one, is to simply hold on to what's left of their financial reality.

From Dream To Nightmare:

Soon after the 2008 Collapse, interest rates shot up over 20 percentage points. In the meantime, securities backed by mortgages hit rock bottom, with many investors nationwide and globally unwilling to purchase these securities, leaving copious amounts of debt on the table. Since then, it has been the U.S. Government, as well as cash-heavy foreign countries such as China, who have picked up the economic slack, a notion which has today left America in a very precarious position as far as its financial infrastructure.

Another part of the fallout from 2008 came when lending institutions suddenly tightened up on their credit on top of raising interest rates. Then, when house values began to fall and families debt to profit ratio rose from a manageable 77% to 127%, in addition to an increasing number of Americans losing employment, all four of the proverbial wheels flew off the proverbial bus. The country was sinking fast from a combination of Low Doc Loans, inflated income reports, and rock bottom mortgage rates that allowed low income earners to buy to their heart's content within a housing bubble. Homes and jobs were being lost, leaving the American dream broken if not now nightmarish, with many Americans turning to services such as National to consolidate and manage their debts.

For many, the job market as well as their finances still seem skittish. And in that regard, their only recourse is to hang on to their work by hook or crook, and save money by spending much less. Abilities to invest are as well far and few between, which leaves those stung by the banks, left in a holding pattern, unable to improve while continually being fearful of falling further.

As precarious as the future is, U.S. investors on a personal level seem to holding still, leaving large-scale funds as the primary movers of stocks either to the positive or negative.

Bailout:

It's been said the ones who deserved it the least, got the wink and nod, not to mention billions of dollars in federal assistance for the damages they initiated in the first place. But in the "too big to fail" scheme of what these institutions meant to America, it seemed part and parcel that the U.S. Government would feel compelled to step in and do as much as possible to right the ship.

While some financial institutions collapsed entirely, the largest ones received substantial amounts of funding to keep their doors open. And yet, as analysts state, with the $1.3 trillion in American subprime loans that were given out to over 7.5 million first-time homebuyers, all of which created an 8 to 12 percentage spike from 2001 to 2008 to where roughly 20% of all mortgages were on the subprime level, what the institutions were committing, virtually, was fraud.

That fraud, however, could not be readily proven. Besides which, it was more important to not let the likes of Bank of America and Morgan Stanley go under, then prosecute them for was characterized by many as illegal activities.

Going forward, the thought again for investors is one of caution, and in many cases overall doubt that their finances are in good hands. Government infighting creates additional hesitation with investors, particularly as issues such as recent inabilities to raise the debt ceiling has influence on stock prices. In short, individuals now and in the future may seek increased opportunities to have more control of their investments with less outward pressure from forces that continue to play out as investor-unfriendly.

Vengeance:

As American watchdog and advocacy groups vociferously complained and sought justice, both through social media and physical protests such as Occupy Wall Street, their anger could no longer be ignored. Soon, the U.S. Department of Justice stepped in, and as of August 2013, has filed suit against (at least) Bank of America for defrauding investors in connection with the sale of over $850 million of residential mortgage-backed securities. This comes in light of a recent Salon magazine news article, in which a B of A employee-turned-whistleblower maintained that she was told to lie to homeowners, fraudulently deny loan modifications and deliberately push them into foreclosure.

Outcomes For Investors:

However, as to the event of making money, banks cannot be the wisest choice for investors, especially as the current issue with lending is to now play it safe; play it safe, in fact, to a fault. And for those who are already involved with lending institutions, it is very likely their investment is making any money due mostly to the banks near non-existent interest rates on their accounts. Other options should be sought out, such as money markets, IRAs and stocks. More risky, yes, but if an investor can absorb the negatives of risk, this should be the route taken even in lieu of the new safe of the banking industry.

Dave Landry Jr. is a personal finance counselor, entrepreneur and amateur investor who hopes to become a savvier as time passes. He lives in Southern California with his two young daughters, whom he feels it is never too early to teach about investing and all things finance. Dave hopes you enjoy this article and continue to seek out other banking articles related to his on SeekingAlpha.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.