People everywhere in the financial community know what that word is, but they refuse to say it. Instead, they are dragging America through a silly-circus.
Unpleasant as it may be, let’s start truth-telling by removing the fig leaf cynically used to cover up this mortgage mess: stated income. It is a canard. The idea that some working-class Bozos from Bakersfield walked in to the local bank; said: “tell me what numbers I need to put on them there loan papers so’s I can git me a house” and thereby hoodwinked the last 20 graduating classes of the London School of Economics does not pass the laugh test. In America’s no-doc and low-doc world, borrowers represented nothing more than a warm body, a Social Security number and a pen.
Serious financiers trust two things they admit to: due diligence and statistics. Since they stopped doing any due diligence, they were clearly relying on numbers they held to be statistically predictive – well, at least to sell the stuff. But to value it? Everyone from mortgage brokers to synthetic derivatives traders to Bob Steel of Wachovia (WB) knew – because it was their business to know – that the American mortgage market has an extremely high incidence of…woops, almost said it…less-than-transparent numbers - from the most esoteric, down to the most basic.
But financiers trust another thing they don’t admit to: the naivete and gullibility of customers.
Property assessments…FICO scores …statistical models…security ratings…insurance…borrower identity …even the titles to properties; in America all these things were regularly falsified or replaced with worthless substitutes. House price depreciation and loan-to-income ratios do not explain our problem. The housing situation in the United Kingdom is by some measures worse than America. Yet S&P (MHP) and Fitch have both written that even at today’s levels, non-conforming RMBS in the UK won’t need to be significantly written down unless UK house prices drop another 5-10%. Even then the downgrades will be modest. Meanwhile, US non-conforming RMBS has already become a “Market For Lemons” filled with securites with all the appeal of Chinese powdered milk.
You, I and everybody can see what the difference is: Fraud. There, I said it. The United States mortgage and mortgage-securities market is shot through with fraud. The mass confusion in the media stems from our inability to use that “f-word”. But we all know it’s out there and the level of denial is getting crazy. If you try to analyze the situation without looking at the fraud, nothing makes sense. If you add a significant, risk-value-changing level of fraud to the system, all the numbers make sense. If we keep pretending it’s not there, we’ll never understand how to fix this.
You can’t mark fraudulent securities to market because fraudulent securities destroy markets. But because acknowledging fraud has been taboo, most people are unable to comprehend how such a systemic failure could even happen. The situation is so bad; the valuations destroyed to such an amazing extent; people are so incredulous and angry, that notions bordering on the bizarre are in wide circulation. The anti-government bias common to people who care about this stuff has led to blaming of the very government guarantees that do exist and have proven reliable. The implicit (now explicit) government backing of the GSEs, the Fed, even the FDIC - because unscrupulous financiers have forced the system to rely on these guarantees so hard or abused them directly, people are looking at the situation backwards and blaming the life preserver for the fact they are in the drink and all wet.
The weirdest notion – made popular for political purposes – has been that the GSEs and government housing programs have done all this. The core of this silly argument is that because unscrupulous financiers were able to blend agency paper with fraud-filled private-label paper in structured products, the GSEs and their good paper are to blame. This is like saying that if some company combined the partially-subsidized, government-inspected, wholesome powdered milk we produce here in the U.S. with powdered milk poisoned for profit by Chinese criminals, it would be the FDA that was responsible for the poisoned babies because their programs had artificially reduced the market price.
You may not like government subsidies or government-enforced standards, but they don’t create private fraud. The proof of the pudding is in the valuation. UK RMBS could and probably was synthetically mixed with American agency paper, but UK RMBS is tip-top compared with the junk Paulson wants us all to buy. Government programs to help lower-income people to buy homes clearly competed with the private-sector “program” designed to do the same – subprime. Thank goodness they did, otherwise we’d have even more of this stuff do deal with.
Fraudsters and milk-poisoners can try the lame excuse that they are innocent of the toxic results of their misdeeds because the price in the market was too low. That’s just more evidence of their perfidy. They need a lesson in a little concept called “personal responsibility”. But the American financial community clearly believes that personal responsibility is for government and the little people, not them.
Yet the bottom line is that every time a mortgage broker, a commercial banker, an investment banker, a ratings agency or an insurer signed off on one of these phony loans or phony deals THEY gave their word. They put their reputations on the line. They accepted moral and ethical responsibility. They failed – at best. Nobody forced them to commit fraud or malpractice by passing off toxic junk as sound investment to make themselves a big, crooked profit.
As for the LSE graduates and “big swinging d---s” who would still try and foist the blame on working-class dupes, dopes and ne’er-do-wells who can’t pay, stop embarrassing yourselves. You knew what you were doing. You can keep selling that story to the press as long as there’s a bid for it, but it won’t work with me. More importantly, it will do nothing to recapitalize the system you’ve destroyed with your dishonesty and arrogance.
Neither the (alleged) Paulson Plan nor the new Paulson-Bush-McCain-McConnell-Gregg-Franks-Reid-Mr. Magoo-Dr. Doolittle Plan will work either. Unless we do something to get some honesty into this system nobody will buy and nobody will lend.
The game is over. Time to tell the truth.
Disclosure: none
