Obama is of course correct in his outrage. Taking hundreds of billions of dollars from the taxpayers to cover the appearances of catastrophic losses and then paying bonuses for good management is over the top by any standards. But neither he nor the media is correct in assuming that that the bonuses were not in fact earned by the people who defrauded us in the first place with the mortgage meltdown. Those bonuses were paid BECAUSE PROFIT WAS GENERATED even if it wasn’t completely reported. Nobody seems to get it — the key acronym is OPM (other people’s money). Wall Street did not lose any money, they made record profits, kept it, took taxpayer money too and now they are in the process of also taking the properties of unsuspecting homeowners who still don’t understand what hit them and how it was done.
At no time did the investment bankers have their own capital at risk during the selling of the mortgage backed securities. They were ALWAYS using the money of other people (investors). Every time money moves, financial insitutions make money. In this case both their existence and their profits and fees were and remain largely undisclosed. Starting with the “forward sale” (i.e., selling what you don’t have “yet”) of certificates of mortgage backed securities at a nominal rate of interest that could never be paid and filling in the void with either non-existent mortgage obligations or deals in which the actual expected life of the “loan” was as little as a month and at most five years, investment bankers made astonishing profits PLUS fees. Selling a note with a nominal interest rate of 18% to an investor looking for a 6% return enabled investment bankers to receive $900,000 on a “loan” that was funded for $300,000. You don’t really think they went wild selling these things because they were making money on volume with basis points as fees do you?
And at the “pretender lender” level where a financial institution pretended to be the underwriter of a home loan and where the committees to verify viability, value and income were disbanded, they put on a good face because they were being paid for the renting of their charter to people and companies who were operating as bankers without even being seen, much less regulated. So the “pretender lender” would charge all the “normal” fees for a sub-sub prime loan into which the borrower was steered when they qualified for a conventional loan, PLUS an undisclosed 2.5% fee for renting their charter out to an undisclosed third party. Now Countrywide and others are telling borrowers that they won’t reveal the true name of the lender because the information is confidential. Why? Because when the borrower and investor get together they will have proof positive of identical fraud on both ends of this game. You didn’t think that these lenders were advertising for borrowers because they were making a few hundred dollars on each loan plus interest, did you? NO, they were never at risk because they were using OPM and they got paid $30,000 on that $300,000 loan funding.
Did you think home prices went up because of increased demand for housing? Take a look around you. We have enough inventory to satisfy demand for the next three or four years without another stick being nailed. Home prices went up because Wall Street needed to move money — lots of it — $13 trillion to be exact. And they had a problem. They had run out of borrowers, buyers, and homeowners seeking refinancing. So they invented them and inflated the “price” or “value” of the house to satisfy the demand from Wall Street for $100 billion per month in paper.
It isn’t that the bonuses were unearned or that actual losses were incurred. The story here is that they didn’t lose money and did earn the bonuses. It was everyone else who lost money. And yet we continue to throw money at the “infrastructure” (translation: big institutions) for the same stupid WMD reasons that got us into Iraq. There are 6,000 depository bank institutions in this country alone, most of whom are NOT in trouble. Most community bankers and loan managers at credit unions didn’t play the mortgage meltdown game. Without a penny of “bailout” they could have filled the void created by these giant thieves and credit would be flowing. There is nothing new in that model. Every time a financial institution buckles, the FDIC, OCC, FED or OTS steps in, breaks them up and distributes the assets with value to healthy institutions. The only reason that didn’t happen this time is that government was in bed with the regulators.
Credit will flow when the world has confidence in the United States economy and financial system. A fraud has occurred under our watch (all of us). The system can’t correct until the fraud is corrected, the damages are measured and a plan is in place that will actually (not cosmetically) put people back in the position they were in before the fraud occurred. That means the mortgages must fall, the notes must be reduced (or eliminated) and the investors must have a GOOD bank representing them that will participate in equity appreciation in the homes, not a BAD bank that will apply lipstick to a pig. Right now it is the mortgage servicers and other middlemen who never put up a dime who are getting and keeping the houses and proceeds of foreclosure sales. They are laughing all the way to their own bank.
Putting homeowners back in the black will provide a greater stimulus than any plans being offered today, although the current stimulus packages are badly needed for us to compete globally. Putting investors in a position where they can recover some or all of their investment will inject confidence into limping marketplace. And putting the thieves in jail will tell the world, we recognize and correct our mistakes — giving us a chance to regain or re-earn some moral high ground.
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