The Financial 'F-Word' That Needs To Be Said 11 comments
David Bailey
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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
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This article has 11 comments:
The LP is running an experienced candidate, Bob Barr, for President and is currently on 46 state ballots.
I invite everyone to visit the LP website (www.lp.org), learn about Bob and the LP platform, register as a Libertarian, and cast their vote for true change in November. By write-in if necessary. Please spread the word that there is a real alternative to the Democrats and Republicans if we take matters into our own hands in the voting booth. There is still time to rally behind Bob, so spread the word via your blog, e-mails, and by word of mouth. Help lead the way in taking back our freedom and protecting our Constitution!
As for who is to blame, yeh I have seen the video, it is all the fault of the do gooder Democrats trying to get all of those poor blacks and Hispanics into their own homes. George fought against it and the banks had their arms twisted to make the loans. As with any transaction, just find out who made all the money and you know who is principally responsible. All that those poor blacks and Hispanics got out of it was being turfed out of their homes.
October 2, 2008 10:39 am EST
Originially published at the Washington Times ...
Just one week ago, Treasury Secretary Henry Paulson was demanding that Congress grant him unprecedented, unreviewable authority to spend $700 billion or more to bail-out Wall Street. But in a major rebuke to the administration and to both the Republican and Democratic congressional leadership, the House voted down the 110-page plan that emerged from last weekend´s frenzied — if not unseemly — effort by Mr. Paulson to salvage a bailout deal.
The Dow dropped some 10 percentage points in reaction to the House vote and, while that was less than a third of the massive percentage drop it suffered in 1987, it shouldn´t surprise anyone that Wall Street was upset at being denied at least $700 billion of taxpayer´s money to practice more of what got it into trouble in the first place — buying up over-valued mortgage-based securities. A majority of members of Congress correctly concluded that the leadership-backed bailout bill was, to put it mildly, bad and that the closed-door sessions that spawned it were deeply flawed as well.
Perhaps at long last, some basic understanding of economics is seeping into the Capitol. Dare we hope that some members now understand the fact that Congress can only redistribute, not eliminate, the pain of an economic downturn? At a minimum now, as a result of the House “no” vote, Congress has time to seriously consider alternative strategies and it needs to press its advantage.
The starting point should be private market adjustment. With the knowledge that an easy government bailout is no longer around the corner, the markets can get serious about working through the mountain of bad debt that imperils homeowners, banks and companies alike.
Unfortunately, artificial booms inevitably lead to painful busts, but these can be productively addressed. Today, this means a mix of bankruptcies, company workouts, and takeovers as we are seeing in the banking sector and outside investors buying large pieces of companies, such as Warren Buffett´s $5 billion investment in Goldman Sachs. This process will reward more responsible firms and encourage them to move early to correct past mistakes.
Many companies also will have to sell mortgage-backed securities. Obviously, companies holding over-valued mortgage-based securities (MBS) prefer to dump bad securities on the government than sell them in a down market. But there is a market even though asset values are uncertain. Merrill Lynch liquidated its MBSs in July.
Bailout advocates simultaneously tell us that these assets are “toxic” and are destroying firms, but which magically at the same time are possessed of value that will ultimately make money for the government if it is allowed to buy them with taxpayer funds. However, good business leaders know that private investors are better able than government officials to dig out that hidden value. Private buyers, too, could participate in reverse auctions and hire asset managers on their dime, not the taxpayer´s. This adjustment process should be carried out in the marketplace — not behind closed doors in Washington.
Both Congress and the administration should focus on cleaning up the mess, not making it potentially far worse. Federal and state authorities need to begin to aggressively prosecute fraud in private markets; fraud that has resulted in trillions of dollars of grossly and deliberately, if not criminally negligently, overvalued mortgage paper. The goal is not to create scapegoats, but to keep markets clean. At the same time, we need a thorough investigation of the misbehavior of public officials in spurring Fannie Mae and Freddie Mac, for instance, to engage in reckless lending. Many of the politicians leading the attack on Wall Street for its failures worked overtime to create the subprime lending debacle.
Congress should rein in the Federal Reserve System. Over the last decade the Fed has followed an easy money policy designed to spur economic growth. But this encouraged irresponsible lending and inflated property values. Increasing the money supply is a bit like mainlining heroin — it´s pleasant while you´re doing it, but it´s extremely painful when you finally stop. Yet as currently configured, the Fed is neither transparent nor accountable.
Congress must say never again with Fannie Mae and Freddie Mac, which lowered mortgage standards and pushed people into new or larger homes than they could afford. These government-sponsored enterprises must be privatized; there must be no more implicit or explicit public guarantees for mortgage lending.
Congress needs to repeal the Community Reinvestment Act. The CRA effectively forces banks to lend to poorer communities irrespective of the creditworthiness of borrowers. Many of the same legislators who demanded increased bank lending in the inner-city now criticize banks for making “predatory loans.” Agencies such as the Securities and Exchange Commission need to suspend the mark-to-market accounting standard and reconsider its application. The rule makes sense for trading assets, especially where values are well established; however, the standard has a perverse impact when applied to long-term income-producing assets in a volatile market. A single major, bad sale can force a major corporate write-down, artificially crippling an otherwise creditworthy firm.
We need better, more streamlined regulation, not more regulation. There are a multitude of government financial regulators, leaving us with expensive controls, but without the transparency most needed by customers and investors.
Finally, we must control federal spending. Where is the $700 billion or more for a bailout supposed to come from, in a government already drowning in deficit spending and a spiraling national debt? Who will bail-out the federal government when investors at home and abroad refuse to buy its paper Instead of attempting to ram through a new version of this bad bill, the president and congressional leaders should announce that a government bailout is off the table. Companies and institutions must focus on systematically working through their problems, in a transparent, focused effort, utilizing the tools in the government´s already-massive quiver of tools.
We must learn from today´s economic disaster lest, to paraphrase George Santayana, we repeat this painful experience in the years ahead.
Bob Barr, a former Republican congressman from Georgia, is the official candidate for president of the Libertarian Party.
Since the author brought up the "fraud" word, let's just think about old Hank Paulson for a minute. He takes his half billion dollars in stock from GS, sells it and pays no capital gains because of a little known law that encourages qualified people to work in government at a miniscule fraction of their private sector salaries, but gives them a nice carrot as a reward. Then he comes up with a plan to buy assets with government money with no review and no legal liability. GS, MS, BAC et al are lined up to help Hank with his little project because they will get to double, triple or quadruple dip on $700 Billion. After all, aren't these the same guys that made up these investments in the first place and got paid fees and commissions to put them together and sell them? Now supposedly they will fix them?
Come on folks, this is the most blatant fraud perpetuated on the public in a long long time. The public smells a rat and is inundating the Congress with negative opinions. They are right.
If Warren Buffett doesn't understand these investments, I humbly suggest not many others do either. Let them fail, let the market go wherever it is going to go. We have bankruptcy laws that are good enough to handle LEH, others can participate also. Eventually entrepreneurs in each locality will buy up the houses from the bankruptcy courts, fix them up, sell them at reasonable prices or rent them out. Intervention in this process by the government is unnecessary and counterproductive.
People working in governments seldom get it right because if they could they would be making part of the $66 Billion paid to the employees of the investment banking companies in 2007. These are the people that are going to set prices?? Good luck.
jegan ;-)
So sad.
Oct 04 07:05 AM
If the wave of foreclosures started when the increased rates of ARM's for mortgages written 3 or 4 years ago began to kick in, because the rate increases were exhorbitant and much of the value of the RMBS that is toxic was valued by the these then Paulson's Plan is obviously not the solution, it just takes the bankers that profited from these toxic mortgages and the RMBS paper off the hook. It is fraud and using people in low incomes as scapegoats wont change that. If Congress had asked questions before they bought into this mess, they could have acted to put a freeze on these rate adjustments, now even if they act to reduce these ARM rates the Banks are off the hook and the taxpayer is on it.
So sad. This is massive fraud. Mortgage lenders are aggressively foreclosing on people while not being responsive to any alternatives. I saw a guy who had to wait for his disability payments to start when he came back from Iraq and he lost his house even though he notified the bank and sent in the money as soon as he got it, they refused to take it. (CNN?) Now that Fannie and Freddie are gone it looks like the money is going to flow again. This was totally engineered IMHO.
J Egan, I'd love to give you some names, but I think their banks are all closed now.
Just listen to some conservative radio. They still support the phony mortgage industry.