I enjoy calculating our own finances and knew already how big a mortgage we could afford. The bank employee took all the information I provided and entered it into his computer. He then informed us that we were approved for an amount which was consistent with my own calculations. He provided us with a document certifying our pre-approval, and then, after we had shook hands to say goodbye, he casually tells me: "If you want to borrow more than that, we can arrange it." I remember telling Pam: "That is weird." Why would a bank be willing to loan more than its customer could afford to pay back?
I know now that we were witnessing the early stages of a banking system gone amok, and that what we witnessed was the origin of the American financial crisis of 2008 and of the current European financial crisis. The banks responsible for originating loans had managed to free themselves from the cost of making bad loans. This was, and is, completely counter to the way a normal, honest banking system operates. How it is supposed to work is that the banks share in the costs of bad loans. If its customer can't repay the loan, the bank loses the money it lent. A bank that repeatedly makes bad loans goes bankrupt. Good banks thrive and survive in order to support American free enterprise. It's the American way.
When we moved to Cleveland, in 2005, we were once again interested in buying a house. Housing prices were skyrocketing. The kind of house we were interested in was priced near $200,000. Traditional banking logic said that this was only possible if Pam got a second job. They would want 20% down, leaving us with payments of $860 a month plus real estate taxes. This was clearly something we could not afford, so we rented. Our landlord at the time: Phil, worked for a financial firm originating mortgages. No problem he tells us. He can get us a loan. We should be looking more in the $500,000 range. Maybe even $750,000! Weird. Unless you realize that he got a commission on any loan he originated, no matter how bad the loan was.
Question: "If the bank is not paying the cost of its bad loans, who is?"
So what was going on? That New York bank, and the firm Phil worked for, didn't care if we could repay. They would resell our mortgage on the secondary market; to what I will refer to as the super-banks. In places like Cleveland, people like Phil were out walking the streets in the poorer neighborhoods. They knew that they had nothing to lose. Some poor sucker would think that by working day and night, and with his wife working day and night, and the kids fending for themselves, they could afford to own their own home. Today, many of these people are unemployed, and their meager retirement funds have ended up in the vaults of those Wall Street "banks." They were swindled.
But why would super-banks buy loans originated by people like Phil? The answer is that they had devised means of making short term profits so immense, that they really couldn't bring themselves to care about anything else. They certainly didn't care about the health of American free enterprise. They didn't even care that much about the firm they worked for. I'll only refer to a few of their tricks. First, they took all the mortgages they bought, and bundled them. This allowed them to be sold on the Stock Market, where they argued that the bundles were made up of enough very good loans to make up for all the bad loans. This was a lie.
So why would people who spend their lives picking stocks and bonds recommend buying these bundled mortgages? Bribery and collusion. Standard & Poors, whose job is to evaluate the safety of investments, rated these bundled mortgages as highly safe. Another lie.
Trick number 2: credit default swaps. This is a type of insurance policy for people who want to make highly lucrative, but also highly reckless investments. In this case, you invest heavily in these risky bundled mortgages. You pay a small percentage of your profit to another super-bank, who agrees to take over ownership of these risky investments should they fail. One super-bank makes money selling the credit default swaps. The other is guaranteed to make money even if its investments fail.
The swindle continued until 2007. As more and more people bought houses they couldn't afford, the value of those houses increased, encouraging even more and more people to buy houses they couldn't afford. The economy was good. People were paying off their mortgages, some were even taking out home equity loans on their current homes that were now worth, they were told, double the price they had originally paid.
Pam and I were wisely suspicious and continued to rent a house until the summer of 2007, when we decided to explore the housing market again. We felt comfortable paying about $150,000, but the price for what we wanted was still around $200,000. But we soon saw signs that the bubble had burst. No one was buying. Some of the houses we looked at in the winter and early spring had been on the market for a year or two. In July, we decided to risk offending the seller and offered $110,000 on a fixer-upper priced at $150,000. The sellers accepted.
In 2008, the price of oil spiked and the economy slowed. Employment slowed and people started defaulting on the bad loans. The super-banks who had sold the credit default swaps were the first to bite the dirt. Lehman Brothers went bankrupt. With the collapse of the banks ensuring the bad loans, the collapse of those banks holding the bad loans would follow shortly.
Did we need to bail out these banks? Is it true that letting them all go bankrupt would have plunged us in to the second Great Depression? I don't know.
I do know that Henry Paulson, George W. Bush's treasury secretary, had been the CEO of Goldman Sachs, which was a leader in the development of derivatives and credit default swaps. And that Goldman Sachs actually grew in wealth, profit and influence in the decade from 2002 to 2012.
Goldman Sachs knew that they were profiting from the disaster and hid it from nobody. You have all heard how the very year that they were "bailed out" they paid bonuses of over a million dollars to 953 of their employees. They paid those bonuses in recognition of the good performance of their company. They knew that they had been successful that year. They had successfully dealt in bad loans and passed on the cost of those bad loans to the American consumer and to the American tax-payer.
Due to the success of their lobbying campaigns, these banks have emerged from the catastrophe still intact and unregulated. The assets of the four biggest American banks: J.P. Morgan Chase, Bank of America, Citigroup and Wells Fargo- now equal 62 percent of total commercial bank assets. That's up from 54 percent two years before the banking crisis. (According to Robert Reich blog: December 9, 2011.) These banks have profited from a highly successful lobbying campaign which has succeeded in passing on blame to the American consumer and has successfully discredited all attempts to regulate their behavior. The two congressmen whose names are on the bill aimed at regulating them: Frank and Dodd, are retiring from congress. Their bill has been mutilated and is not being enforced.
The effects of the policies of these super banks were devastating to the American economy. From the height of the housing bubble to the bottom of its collapse, the value of homes in America declined by $5.5 trillion. The same people who were fueling the economy by taking out home equity loans on their over priced homes, are now saving every dime in a last-ditch effort to rebuild their retirement accounts. Many are unemployed and have stopped paying taxes and are now receiving unemployment, thereby plunging the federal budget in to a deep deficit.
Entire neighborhoods in cities like Cleveland are now boarded up. Where once people were renting their homes, they have now moved out and are packed in living with their relatives. Their meager life's savings have ended up quite literally in the pockets of the Wall Street banks.
But here is the clincher. Our next president will almost certainly be submissive to the authority of Wall Street. Mitt Romney lays claim to business experience in the private sector, but he doesn't say that his experience is that of a Wall Street banker. Romney enriched himself through the success of Bain Capital, which he created in 1984. The specialty of Bain Capital was leveraged buyouts. This is where an investment firm buys a poorly performing company on the verge of bankruptcy. It then proceeds to lay off all the employees and to rehire a greatly reduced number at a lower wage. They then resell the company for a profit.
As for Newt Gingrich, he is reported to have been paid $1.6 million dollars for his services as a consultant historian to Freddie Mac, the Federal Home Loan Mortgage Company. This comes as the SEC has brought a civil suit against the CEOs of Freddie Mac and Fannie Mae: Richard Syron and Daniel Mudd, arguing that they failed to properly inform their stock holders of the risky nature of sub-prime mortgages. Mind you, this is a civil case, which means that Syron and Mudd won't be paying any of their personal money for their wrong-doing. It will come from the companies they worked for. Mind you also, the company they worked for was taken over by the federal government in 2008 and saved at a cost of $170 billion so far, and still counting. Finally, let it be noted that these two individuals had a combined income of $30 million from 2006-2008, during which time their corporations went bankrupt. (My numbers come from the NPR version of this story: http://www.npr.org/2011/12/16/143859110/sec-charges-fannie-mae-freddie-mac-officials)
As for President Obama, who has recently adopted some "Occupy Wall Street" rhetoric, his presidential campaign has thus far received more donations from Wall Street than all the Republicans combined. He has presided over an administration which has done nothing to inform the American people of the nature of this national disgrace.
People.
It is time to wake up.
Don't let Wall Street run our country.
Don't vote for anyone, Republican or Democrat, who is dependent on Wall Street money.
That will surely mean you'll have to write in somebody, instead of accepting the choices presented to you next November.
Don't give in to all that corporate financed advertising which is going to try to tell you that the Democrat is a sleazeball socialist and that the Republican is the great savior of threatened small business and American values.
In fact, both parties have sold their souls to the demands of big money.
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