The finance industry has been getting its own way for years, and as it happens, that way has been a disaster for everyone. These are the people who know better than everyone else how economies should be run and markets (de)regulated:
... As recently as March, [Lehman Brothers CEO Richard] Fuld was awarded a $22 million bonus for 2007 -- a generous pay package to be sure, but one that also reflected a year in which the bank's net profit had risen 5 percent to a record $4.2 billion.But Lehman soon emerged as Wall Street's next domino as real estate loans and other toxic assets increasingly weighed on its balance sheet, especially after the collapse of Bear Stearns Cos Inc in March. ...
After a buyout deal fell through on Sunday, Lehman Brothers is facing bankruptcy, with Merrill Lynch and AIG following close behind.
Funny how even the favorite institutions of the free market fundamentalists can't survive in an unregulated free-for-all.
But unlike you or I, businesses like Lehman, Merrill Lynch and AIG are too important to be allowed to fail, so the public is going to have to pay for their obscene private profit taking:
... With both Merrill Lynch and AIG seen as extremely weak (both lost more than 30% of their market value on Friday alone), a liquidation of Lehman could bring them, and others, down, in a collapsing house of cards.The reason is that in a liquidation, all the liabilities become immediately due, whereas the assets need to be sold to willing buyers. So the "loss" in such a collapse is not, as it would be in normal times, the difference between the liabilities and the assets, it is the difference between the liabilities and what money can be realised fast with the assets. It's the difference between the value for you of a mobile phone, and its value for a junkie that needs to raise cash quick to get its cash. ...
We're all going to have to pay for their greed and arrogance as taxpayers, as in the government takeover of Freddie Mac and Fannie Mae, even as we've already had to pay for their predatory business practices. But what did the leading lights of the finance industry think was going to happen when they destroyed the financial security of the very customers who keep the market humming? What did they think was going to happen when the industry was based on pyramid scheme resellings of the only type of loan industry-favored regulation lets people walk away from anymore, their home loans?
Something had to give. People started mailing in their house keys instead of their mortgage payments. The glorified crap shoot of hedge fund real estate portfolios, 'safe' paper that all the major institutions are relying on either to guarantee accounts payable or that accounts receivable can pay, came to a squishy halt. Lenders kept insisting that the real estate market had nowhere to go but up, reality had other ideas.
Earlier this year, I talked with Rep. Brad Miller (D-NC) and Colorado 2nd District Democratic congressional candidate Jared Polis about the roots of this credit crisis and the effect it's been having on ordinary people. Join me on the flip ...
Home Equity
In spite of a "Help for Homeowners" law that Miller helped pass this year that threatened penalties for foreclosure-happy banks, the mortgage industry has not done as they'd like to be done to. Foreclosures in August 2008 are up 27 percent from August 2007 and the ratio of bank-owned real estate is as high as it was during the Great Depression in 1930.
"The foreclosure problem, the housing problem that we've got, is not the result of lenders bending over backwards, trying too hard to help borrowers who would otherwise not qualify to have their own mortgages. It's the result of abusive practices trapping people who already own their home into borrowing repeatedly," Miller said. He also said that passing consumer protections three to five years ago would have prevented these problems.
Miller's work in the House Financial Services Committee has given him reason to closely scrutinize the industry, and there were worrying signs even in 2003, when subprime mortgages had dramatically increased to eight percent of all mortgages.
In the 2005-2006 timeframe, Miller saw subprime mortgages account for 28 percent of all mortgages. He said everyone expected that borrowers would refinance within two to three years, paying penalties and fees to transfer into new loans. With 90 percent of the subprime loans having adjustable interest rates that kicked in after those two to three years and 70 percent having prepayment penalties of up to five percent, refinancing would have been the thing to do. If, that is, it wouldn't have been better to sell the house. He added that 55 percent of those borrowers should have qualified for prime loans.
"It was designed to strip away the equity that homeowners had in their homes. And that was the business model," Miller said.
Overkill
While Miller sees the financial crisis leading to changes in the law and increased support for consumer protection, the same industry that's now reeling from purchases of mortgage-backed securities had previously gotten weak federal laws enacted for the purpose of preempting stricter state laws.
"The abuse of borrowers was the original sin," Miller said. "If we'd had a president or a Congress that was not completely obedient to industry, those loans would never have been made." He pointed out that the Housing and Urban Development agency could have protected borrowers at closing by requiring better disclosure, but the Bush administration has been "entirely on the side of industry and showed no concern at all for how ordinary Americans were affected."
The district Jared Polis is running to represent includes Adams County, one of the hardest hit in the country as of 2007 and a 2008 foreclosure rate of every 1 in 44 households, where he says "everybody's been affected, or knows someone who has." He said that as he walked doors in the county, he sees houses for sale after being seized and said that a lot of families with young kids were often the worst hurt.
Polis said it could be worse, as many people who've lost their homes still have jobs, but there's a whole host of predatory lending practices that are to blame.
"We also need to look at payday companies, credit card companies and other predatory lenders that contribute to the vicious cycle of debt," Polis said. He described bankruptcy reform as a giveaway to the credit card companies, saying that "all these different forms of debt conspire to force people out of their homes and into poverty."
Polis singled out the payday lending industry as a particularly bad actor, with some of the franchises charging up to 430 percent interest. He said that efforts to limit payday loan interest in Colorado to 39 percent, "still pretty high," failed in the state legislature. They "lost the votes of three Democrats because of intense lobbying by the payday industry."
If lenders are going to act like predators, they should take a hint from biology. Predators who kill too many of their prey may enjoy brief population booms, but those booms are always followed by a crash.
You can't prosper in the long run by destroying what sustains you.
Bailout
While Polis said that prevention was easier than fixing the situation after the fact, he pointed to three key areas where leverage should be exerted.
First, he noted that many returning Iraq war veterans don't have homes and deserved a robust federal program to help them get mortgages. Second, he favored the emergency housing assistance fund proposed during the primaries by both Clinton and Obama, to help more people stay in their homes and regain their financial footing. Third, he supports fiscal responsibility at the national level, including cutting back the national debt.
I'd like to hope that we'll elect a president and Congress this year who think like that.
It'd be good if 'responsibility' was something that financial institutions and governments were expected to practice, as well. It'd be good if bailouts weren't only available to the very wealthy and well connected. It'd be good if people were at least as important to the government as markets.
But in the meantime, I'll just sit here, reading about the banks collapsing. And I think I will have another serving of schadenfreude, thanks.
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