Systemic Failure

As the U.S. financial crisis broadens and deepens, wiping out the wealth and savings of tens of millions, destroying hopes and dreams, it is hard not to see in all of this history’s verdict upon this generation.

For how did this befall us, save through decisions that brushed aside lessons that history and experience had taught our fathers?

The motivation was not wicked. Democrats wanted to raise home ownership among African-Americans from 50 percent to the 75 percent of white folks. Rove Republicans wanted to do the same for Hispanics.

Banks were morally pressured by politicians into making home loans to folks who could not remotely qualify under standards set by decades of experience with mortgage defaults.

Made by the millions, these loans were sold in vast quantities to Fannie Mae and Freddie Mac. There they were packaged, converted into mortgage-backed securities and sold to the big banks. The banks put scores of billions of dollars worth on their books and sold the rest to foreign banks anxious to acquire Triple-A securities, backed by real estate in America’s ever-booming housing market.

Computer whizzes devised exotic instruments—derivatives, which could soar in value, making instant multimillionaires, but also plummet, based on rises and dips in the underlying value of the paper.

Came now young geniuses at AIG to insure the banks against catastrophic losses, should the U.S. housing market crash. As the risk was minuscule, premiums were tiny. Payouts, however, should it come to that, were beyond AIG’s capacity.

In AIG’s Financial Products division, based in Connecticut and London, brainiacs were creating other exotic instruments, such as credit default swaps to guarantee against losses and insure profits. To keep these wunderkinds at AIG, they were promised million-dollar retention bonuses.

The Federal Reserve, by keeping interest rates low and money gushing into the economy, created the bubble that saw housing prices rise annually at 10, 15 and 20 percent.

As the economy grew, however, the Fed began to tighten, to raise interest rates. Mortgage terms became tougher. Housing prices stabilized. Homeowners with sub-prime mortgages now found they had to start paying down principal. People losing jobs began to walk away from their houses.

Belatedly, folks awoke to the reality that housing prices could go south as well as north, and all that paper spread all over the world was overvalued, and a good bit of it might be worthless.

There are the politicians who bullied banks into making loans the banks knew were bad to begin with and would never have made without threats or the promise of political favors.

There is that den of thieves at Fannie and Freddie who massaged the politicians with campaign contributions and walked away from the wreckage with tens of millions in salaries and bonuses.

There are the idiot bankers who bought up securities backed by sub-prime mortgages and were too indolent to inspect the rotten paper on their books. There are the ratings agencies, like Moody’s and Standard & Poor’s, who gazed at the paper and declared it to be Grade A prime.

In short, this generation of political and financial elites has proven itself unfit to govern a great nation. What we have is a system failure that is rooted in a societal failure. Behind our disaster lie the greed, stupidity and incompetence of the leadership of a generation.

He is going to borrow and spend trillions more to bring back the good old days, though it was the good old days that brought us to the edge of the abyss into which we have fallen. Then he is going to spend new trillions to give us benefits we do not now have, though the national debt is surging to 100 percent of the Gross National Product, and may reach there by 2011.

Is he willing to say that home ownership is for those with sound credit and solid jobs? Is he willing to say that credit, whether for auto loans, or student loans, or consumer purchases, should be restricted to those who have shown the maturity to manage debt—and no others need apply?

“Avarice, ambition,” warned John Adams, “would break the strongest cords of our Constitution as a whale goes through a net. Our Constitution is made only for a moral and religious people. It is wholly inadequate to the government of any other.”

In this deepening crisis, what is being tested is not simply the resilience of capitalism, but the character of a people.

"Democrats wanted to raise home ownership among African-Americans from 50 percent to the 75 percent of white folks. Rove Republicans wanted to do the same for Hispanics. Banks were morally pressured by politicians into making home loans to folks who could not remotely qualify under standards set by decades of experience with mortgage defaults."

An excellent analysis of the moral corruption that led to the financial crisis.

Although it was certainly a contributing factor, blaming the entire mess on under-qualified minorities ignores the fact that, during the Housing Bubble Mania, people with steady average jobs were paying $400,000 for $200,000 houses and people with high paying jobs were paying $800,000 for $400,000 houses.

Look back over the old "Is there a Housing Bubble" threads on FR and you will see the Bubble Mania in full bloom. Those who warned against the Bubble Mania were accused of being "Democrats trying to talk down the economy".

And, during the Bubble Mania, "lenders" threw money at them in the form of highly risky mortgages that were obviously ticking time-bombs.

MAY 18, 2005 - A Growing Tide of Risky Mortgages ... Here are some scary statistics: In 2004, fully 50.4% of the mortgage loans issued for purchases of single-family homes in Georgia were to pay interest only. That made the Peach State No. 1 in the nation in its share of interest-only mortgages. But a whole bunch of other states were not far behind: California was second, at 47.1%, .... The trouble comes when the interest-only feature expires, which is often after 10 years. If it's a 30-year loan, then the entire principal has to be paid off in the final 20 years. So the monthly payment could abruptly jump by 50% -- even assuming no increase in the interest rate ..... Lenders that make interest-only loans argue that there's little risk of a wave of defaults as long as the economy remains reasonably strong and housing prices don't crash. But even some parties that benefit from the rage for interest-only mortgages, like homebuilders, are wondering if the trend may have gone too far. "In most of those cases, buyers have no idea how they're going to pay" the higher payments that will be owed once principal payments begin, says William J. Pulte, founder and chairman of Pulte Homes

Why would a "lender" endanger his money so irresponsibly?

I explained in another post in another thread:

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How the Toxic Mortgage Scam worked:

1. After the Dot.com Bubble burst, investors, not satisfied with slow stock market gains and not satisfied with low interest rates wanted higher returns on their investments.

2. Mortgage Backed Securities looked like a good investment vehicle and they became a hot seller on Wall Street. Mutual funds, pension funds, foreign investors .... they were all eager to buy Mortgage Backed Securities. The more Mortgage Backed Securities loan brokers sold, the more money loan brokers made.

3. One small problem, however. THE SUPPLY OF CREDIT-WORTHY BORROWERS WAS RUNNING OUT. Few credit-worthy borrowers = Few good quality mortgages = Few Mortgage Backed Securities to sell = Fewer profits to be made.

4. What to do?

Easy:

"Forget about 'credit-worthy'. Those pigeons on Wall Street will buy ANY Mortgage Backed Securities we sell. If we put up rotting meat labelled 'Mortgage Backed Securities' for sale, those pigeons will buy the rotted meat from us! If the pigeons die from our rotted meat, we don't care. All we care about is making as much money as we can regardless of the legality of our actions!"

The new business model was: Find an unlimited supply of borrowers with a pulse regardless of ability to repay = Write out an unlimited supply of mortgages to these deadbeats = Bundle up this financial equivalent of tainted meat into an unlimited supply of Mortgage Backed Securities to sell to the pigeons on Wall Street = Rake in an unlimited supply of profits even in we poison the lifeblood of America's economy.

In the Toxic Mortgage Scam, the Wall Street investors (America's mutual funds, America's pension funds, America's individual investors, America's banks) were the "pigeons", the "marks", the "suckers" that were sold that poisonous tainted meat. The so-called "house buyers" were nothing more than the rotted meat used in the scam.

The new twist is that Obama wants our tax dollars to rescue the rotted meat.

“No snowflake in an avalanche ever feels responsible.” Voltaire

70% of what drove our economy’s engine over the last 8 years was consumer spending.

It’s odd how everyone’s a finger-pointing miser now.

Let’s not forget to blame US, the American public, for letting a generation of politicians and special interest groups bully us into being so PC that we were not willing to stand up and say “Everyone doesn’t deserve to OWN a home. Everyone deserves to EARN a home.”

We were too busy shopping at the mall spending our home equity and stock dividends. This was a group effort.

But the mortgages were only the start... Sub-prime is a drop in the bucket compared to the total debt that we have gotten ourselves into. The defaults on Prime Option Arms and Commercial Mortgage Backed Securities and Corporate Bonds that are coming very soon are going to dwarf the sub-prime mess.

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