The Financial Crisis Remedial Edition

For those of us who are not Nobel Prize winning or Ivy League educated economists here is the crux of the financial meltdown in terms we can all understand. Though there are those in the media and the McCain campaign that would have us believe that how we got to this point in history is unimportant I have always believed that those who fail to learn from their past mistakes are bound to repeat them. According to the endless line of economists that now appear hourly on our television screens the economic crisis is too complex for any of us to understand. I would like to take this opportunity to provide a simple explanation of this complex situation based on my own studies.

The financial meltdown by all accounts began with the mortgage crisis and this issue continues to fuel the loss of capital in our national and international financial institutions. So how did the mortgage crisis begin and how did it lead to our current situation? The mortgage crisis began with a noble concept, the concept was to try and provide home ownership to more Americans. It began with the Clinton Administration and continued with the Bush Administration’s “ownership society”. So how did such a noble idea lead to the financial meltdown of today? The problem is that when you open up a system flush with cash and do not provide the proper oversight the greed of some men will warp the good intentions of others. The market was flooded with capital but instead of providing the necessary oversight what little oversight that was present was removed.

The process began with the realtors; they sold houses that had inflated prices. Because of the housing market boom with the increase in capital and buyers the prices for homes were grossly inflated. A home that would have normally been valued at say 100,000 was sold at the inflated price of say 200,000. These inflated prices were based in 2 false assumptions; the first was that housing values always appreciate so that even though the prices were inflated the value would eventually catch-up to the price. The second was that the market was savvy enough to understand the intricacies of all of these new financing instruments or that the sellers did for that much. What we have since learned is that both of these assumptions were proven false. While housing values do historically tend to appreciate there have been times when they have not. Obviously like free booze at a wedding no one thought it would ever run out. It did. So we now have homes that are overpriced based on their true value, therefore any financial assumptions based on these values is flawed. It’s like you have a bank balance that shows 100 dollars when in actuality there is only 50 dollars in the account. It’s all good so long as you don’t have to pay more than 50 dollars.

The next domino was the so-called “sub-prime” buyers who the programs were originally designed to help. For those who have sterling credit and have had it their whole adult lives they have no concept of the thought process of those who do not share their credit ratings. If you have been turned down for credit for so long when you finally get the opportunity to get it, you don’t look at the terms. You are just happy to be able to buy something. Let’s face it folks our country runs on credit, without it you are considered unfit as a person. In the best of circumstances many of these “sub-prime” borrowers were put into homes with these new financing instruments they could not afford. Many of them were balloon instruments that provided affordable payments for a few years and then ballooned up to higher payments. This does not include those who were taken advantage of by predatory lenders. Many of these buyers could barely afford the payments they moved in with, so when the payments ballooned they were unable to make their mortgage payments. While this is unfortunate it doesn’t explain why our financial system went haywire. I mean we foreclose on those homes and resell them right? Wrong. Because these homes were not priced even close to their value all that inflated value was also lost with the original loan, because you are not going to be able to sell the home for that inflated price. So not only did the mortgage company lose the original loan they had an asset that was priced substantially higher than its estimated value. On a small scale these discrepancies could be off-set by other loans or fees; however on a massive scale there was no way to recoup all of these losses.

The final domino was that we allowed Wall Street to bundle these mortgages into securities and sell them. There were two problems with this idea. The first of course was that the price of the assets being held was inflated compared to their actual value. The second was the inherent incompatibility of the concept of using mortgages as securities. Let’s think about this. We sell securities in businesses; the main purpose of a business is to make money or to make a profit. The main purpose of a mortgage for most Americans is to provide a home for their family. While there are those who use their mortgages and homes to generate income and profit, this is not the case for most Americans and especially those who were in the “sub-prime” category. Many of these folks were first or second time home buyers who lacked the savvy to do so. So we have these massive security instruments tied to over-priced assets and to make matters worse we have these CEO’s and other officers who were aware of these pitfalls and pushed the situation to the brink. They not only continued to buy and sell these worthless instruments they leveraged their companies or borrowed against these assets that they knew were over-valued or in many cases questionable.

So you see on paper it all looked good. Everyone was making money and no one cared about the consequences. Then of course the day of reckoning arrived, they could no longer continue to count these worthless assets on their balance sheets. So now after all the profits have been made and all the inflated value has been sucked out of these assets these clowns come to the American public with these predictions of Armageddon if they are not rescued. They want to sell us all of these worthless assets at a profit. Do not be fooled if your home had value before this crisis it still has value. Those who should be worried are those who refinanced or bought overpriced homes in the first place. These are the homes that are seeing their value diminish as they should. Senator McCain wants us to come in and continue to prop up these over inflated homes to protect the banks. Why should I be asked to prop up the value of these people’s homes?

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The Cow Is Already Out Of The Barn

It is good to see that our elected officials are once again using their impeccable timing to save us poor working class folks from being ravaged by the wealthy. There is only one small problem the ravaging has already taken place. These same idiots who supported less or no regulation of business and the markets particularly think that now there maybe a problem with letting corporations and lobbyist write their own legislation and regulations? I’m shocked. Ok folks let’s have a quick recap, the reason we have Medicare, Social Security, and child labor laws is because if given a chance the greedy bastards that are the captains of industry will run this ship aground every time for short term profits.

Mr. Paulson said the government was going to demand greater “transparency” from banks and Wall Street firms, stronger risk management and capital management and a better trading system for complex financial derivatives, such as collateralized debt obligations, that managed to transform risky subprime mortgages into securities with Triple-A ratings.

Senator Charles E. Schumer, the New York Democrat who is a member of the Banking, Housing and Urban Affairs and Finance committees, was both positive and critical about the proposals, saying in a statement: “The administration is finally moving towards where Congress was last year. The good news is, they’re beginning to put their toe in the water when it comes to government involvement to help the economy.

The bad news is, they’re going to have to do a lot more than that to address the problem. We need government action not only to solve the current crisis, but also to prevent a future one.”[1]

So now that all the robberies have taken place the Keystone Cops in the Bush administration want to come in and close the barn door. But like as been stated many times by wiser folks than me, the cow is already out of the barn. The pillaging has been done and not only have they allowed it to happen, they are now in the process of rewarding the same people who drove our economy to the brink. This is similar to the CEO’s of the nations banks and mortgage firms getting raises for orchestrating the biggest economic meltdown according to ex-Fed Chairman Greenspan since WWII. So what is it going to take to wake up the American public to the lies being perpetrated by the wealthy and their political minions.

I once read that capitalism is expecting the greediest among us to do the right thing. Well guess what folks, they are not going to do the right thing. What makes it so bad is that the Bushies can orchestrate a “bail-out” for Wall Street overnight, but do you think they have any help in store for Main Street? Not a chance. So reward the very economic excesses that caused this debacle by bailing out the architects of it and leave those victimized by it to fend for themselves. Is this a great country or what? And rather than us taking to the streets to protest the inequality of these economic policies we sit cowering in our homes hoping that the next wave of lay-offs and foreclosures don’t have our name on them. In the mean time the people who not only have created this mess, but also have the most assets to weather this storm are treated to government intervention while this same government is pissing down our legs and saying not to worry we are on top of this.

I feel better already. The same clowns who removed the regulations and regulators now say they have a handle on this thing. I know according to Senator McCain how we end up stepping into crap is not important, but I beg to differ. If I don’t understand how I keep stepping into crap, guess what I ‘d better invest in a pair of hip-waders because I am going to find myself in heaps of it. The problem is simply this, we have been fed a bunch of BS by the robber-barons of today that more regulation will lead to more costs and lay-offs. Newsflash – How many lay-offs do you think are in the works now that the economy has been trashed by these clowns? The problem is not regulation. The problem is greed. It is the Government’s job to protect those who are weaker from those who are stronger. How many “Gilded Ages” do we have to go through to understand this?

[1] http://www.nytimes.com/2008/03/13/business/13cnd-paulson.html?hp

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Where’s The Garlic When You Need It?

In what is sure to become the new profit center for “legitimate banks”, many are now salivating at the check cashing/payday loan market. These customers were forced to go to the blood suckers at the payday loan offices because the legitimate banks had shunned them or did not have branches in their neighborhoods. Well, now that the market has ballooned into a 10 billion dollar a year enterprise guess who wants to reach out to these poor underserved consumers? The same banks that were under serving them, talk about the ultimate irony. The good news is that you escaped the werewolf; the bad news is you did it by running into Count Dracula’s castle and its after dark.

WASHINGTON — After years of watching check-cashing stores and payday lenders steal potential customers, banks and credit unions are beginning to offer the same services and products, but in more affordable and responsible ways.

The movement comes as federal bank regulators focus their attention on the estimated 73 million Americans who are underserved by the nation's banking industry.

The hope is that mainstream financial institutions can convert the check-cashing customers and payday loan-seekers of today into the sought-after depositors and low-risk borrowers of tomorrow.[1]

Here is where it gets good, the banks and Feds would have us to believe they are doing this to drive the costs of these services down. I’m sorry, but when have banks ever reduce the costs of their services? They are tired of letting the other loan sharks make a killing and now they want to muscle in and legitimize the fleecing. Using the excuse that the current purveyors of these services are overcharging, these legitimate banks relying on their lobbyists and legislators will low-ball the competition or buy them out and have total access to these billions of dollars. Unfortunately for the current industry it won’t be hard; they have done everything in their power to undermine themselves. They have been charging exorbitant fees, they have treated their customers like crap, and they have resisted any changes to their business model.

In what has to be the most insane marketing campaign I have ever witnessed they are now running an ad by the “Community Financial Services Association Employees” stating that they are now going to make their rates understandable to their customers, no more small print. I don’t know how you can hide 400% annual interest in fine print, but I guess you can. Why is it whenever an industry gets in trouble they come out with these “feel good” ads about how they are just trying to help out the community? These people are predators, pure and simple. They prey on the low to middle income in an effort to keep them in the high cost borrowing cycle.

For those that don’t know the program, it works like this. People who ordinarily are not able to qualify for bank or credit union loans, (eventhough many have accounts at these institutions) they go to these payday or title loan places (which usually double as check cashing centers) where they are offered small cash loans. The consumer will apply for the loan and upon approval will present the lender with blank personal checks that will be deposited on the day the borrower is paid. Here is the kicker, the annual interest on these loans average about 400% of the principal; because the lender only talks about the two week rate the consumer is usually unaware of the astronomical rate charged. The borrower can continue the loan at the maturity date by simply paying the interest of the loan. This is how the cycle begins, the borrower rather than paying off the principle will continue to pay the interest over and over or will pay off the loan only to have to take out another loan because they cannot afford the loss of income.

But today, Mary Cheh brought three former payday loan employees who said they were in business to hook low-income wage earners into a cycle of debt. This is Mike Donovan. He resigned yesterday a Check 'n Go District Manager.

Mike Donovan, Former Payday Loan District Manager:

“The average Check 'n Go customer in Washington, D.C. is continuously in debt to the company for over a year. We train our sales staff to keep customers dependent. The repeat borrower is vital to our business model.”

Bill Harrod was a payday loan manager for 10 months and says he was trained to target a specific community.

Bill Harrod, Former Payday Loan Manager:

“My company was deliberately targeting minority people for a continuous loan process that they would never, ever get out of. “

And Cameron Blakely is a former payday loan store manager.

Cameron Blakely, Former Payday Loan Store Manager:

“Our borrowers were like indentured servants. They work, they work, but each payday we claimed a piece of their paycheck. Every paycheck.”

The Community Financial Services Association, the payday loan association, says today's allegations do not represent the experiences of millions of customers and employees in payday stores across the country.[2]

These types of predatory loan practices are not unusual, but are indicative of this industry. Once again wealth cannot be gained by low income workers because the cost for their services is always higher than the public at large. They pay more for everything from food due to a lack of grocery stores, check cashing due to a lack of banking services, and transportation due to credit difficulties.

While I am no fan of these types of lenders, I am not naïve enough to believe that bankers will come in and make it all better. The problem is that they see an opportunity to take advantage of a consumer that will not complain or call their legislator. This is the same industry that is front of Congress regularly for high interest and bad loan practices on credit cards and other service fees. Now we are to believe that they won’t bring that same greed to an industry that has been allowed to bleed communities dry? This is a travesty, the consumers will still be fleeced but by “legitimate banks and credit unions”, that ought to make them feel better.

There is a system being deployed in many Third World countries where low income or even poor people are given small cash loans at interest rates that are low to help them start up small home businesses or for education. There is even a program at Kiva Org. where you can help provide the proceeds for these loans. They call them micro-finance loans and they are given to people to help them begin the process of rebuilding their lives. They are being utilized all over the world, except here. Here we have low income people being fleeced by greedy corporations, in another instance of transfer of wealth from the needy to the greedy. Where is the garlic for these blood suckers when you need it?

[1] http://www.mcclatchydc.com/226/story/22683.html
[2] http://www.nbc4.com/consumer/14100234/detail.html

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