Culpability for the Mortgage Meltdown: WHO WANTED BAD LOANS?

[Hannah Bell]

The release of the first batch of FCIC interview reveals interesting finger-pointing among some of the major players. We’ve argued...that the subprime shorts drove the demand for bad mortgages. There is no other explanation for the explosion of demand for “spready,” meaning bad, mortgages that started in the third quarter of 2005. As Tom Adams and I describe in a recent post:

Signs of recklessness were more visible in 2004 and 2005...So why, with the trouble obvious in the 2005 time frame, did the market create even worse loans in late 2005 through the beginning of the meltdown, in mid 2007, even as demand for better mortgage loans was waning? It’s critical to recognize that this is an unheard of pattern. Normally, when interest rates rise (and the Fed had begun tightening), appetite for the weakest loans falls first; the highest quality credits continue to be sought by lenders, albeit on somewhat less favorable terms to the borrowers than before.

In other words: who wanted bad loans?…


http://www.nakedcapitalism.com/2011/02/paulson-denies-culpability-in-crisis-yet-even-bear-turned-down-his-deals.html


The authors go on to note:

1. FCIC's explanation ("lax regulation") doesn't wash -- it applies to all financial sectors, but the rot centered in mortgages...

2. Mortgage industry bonuses were at unprecedented heights: why had the industry never paid such bonuses before? Where did the money come from? (From making unprecedented numbers of bad loans while betting against them.)

3. Why were there market incentives to make bad loans? Short answer = "hedge funds," CDOs. Longer explanation here:

http://www.nakedcapitalism.com/2011/01/fcic-report-misses-central-issue-why-was-there-demand-for-bad-mortgage-loans.html

4. Authors finger John Paulson (edit because wrong Paulson, here's the right one, but there's still a Goldman connection)

Paulson & Co., Inc., is the manager of several hedge funds, which are loosely regulated investment funds. His firm had assets under management (as of June 1, 2007) of $12.5 billion (95% from institutions), which had jumped to $36 billion by November 2008.<4> In 2007 alone his firm earned $15 billion.<5>

Under his direction, Paulson & Co has capitalized on the problems in the foreclosure and mortgage backed securities (MBS) markets. In 2008 he decided to start a new fund that would capitalize on Wall Street's capital problems by lending money to investment banks and other hedge funds currently feeling the pressure of the more than $345 billion of write downs resulting from under-performing assets linked to the housing market. On May 15, 2008, Paulson & Co., which bought 50 million shares of Yahoo stock during the first quarter of 2008, said it is supporting Carl Icahn on a proxy fight to replace Yahoo's board.<6> In early 2008, the firm hired former Federal Reserve Chairman Alan Greenspan.


http://en.wikipedia.org/wiki/John_Paulson

http://www.nakedcapitalism.com/2011/02/paulson-denies-culpability-in-crisis-yet-even-bear-turned-down-his-deals.html

[grasswire]

1. Didn't lenders target minorities?

Wasn't this really an attack on certain groups? Couldn't this be prosecuted as a civil rights violation, if certain groups WERE deliberately targeted for failing schemes?

[Hannah Bell]

2. Yes to all of the above, I'd think. But more than that -- if they're betting against

the loans they're making, it's deliberate, premeditated fraud, i.e. they knowingly made bad loans, the worse the better, to get the other payoff. Not just against minorities, but against practically everyone in the country -- and world.

These people need to be in jail, & worse. Paulson is a criminal, & so are the rest of his peeps.

[grasswire]

4. I'm real cynical about this

I believe the attack on New Orleans and this are related. Deliberately sowing chaos and destruction in minority communities. It's a war.

[Hannah Bell]

5. either that, or poor communities are the low-hanging fruit -- easiest to hit first.

it's war either way.

[grasswire]

7. when coupled with what has happened to black families...

...due to the prison industrial complex, I can't help but think it's race war. Infuriating.

[Hannah Bell]

8. the drug/prison thing i'm fully convinced of. but i don't believe the aim is directly

to harm minorities (though obviously that's a direct effect); rather to maintain hostile racial/ethnic camps that will fight each other at the beck & call of the ruling class.

that's been a technique of rulers for a very long time & it's inherent in identity politics as well. no surprise that the general ferment of the 60s dissolved into a basket of resentful "identities" (including "white"), each attacking its "opposite" rhetorically & lobbying power for a bigger piece of the pie. They play us against each other & we buy into it, taking these manufactured "identities" as our own.

black v. white
hispanic v. anglo/black
female v. male
gay v. straight
young v. old
native v. immigrant
religious v. non-religious
wasp/black v. jew
dems/liberals v. pubs/conservatives
red states v. blue states


etc.

all the tv/media-engendered identities too. why do we have the idea that the typical "black male" = a gang-banger? you have only to look at the media. & kids take on those media-engendered ideas of masculinity/toughness/coolness & replicate/expand them as if they'd invented them.

how do we know who we "are"? it used to be our ideas about that came from our directly-lived experience. more and more they come from outside -- like an infection. in direct parallel with the destruction of our real communities, families, livelihoods, and power.

[leftstreet]

6. I think it was the economic vulnerability

That impoverished communities trend minority was probably not very relevant.

Watch what happens as they keep sliding the 'middle class' into poverty. The nouveau impoverished will be just as vulnerable.

[datan]

11. hm...

I don't think you have a clue how securitization works.

The people who "knowingly made bad loans" are the originators. When these loans are pooled they usually come with reps and warranties as to the quality of the underlying loans (e.g. borrower income, whether the home is for investment or primary residence etc.) These securities have been sold on to various parties including pension funds, hedge funds, insurance funds, etc. IF the securitization was not up to standard, the holders of securities can commence action against the originators (most of which are gone or swallowed by larger banks). Such action can include asking the originator to buy back the underlying loan since it wasn't up to standard. This is covered under the Pooling and Servicing Agreement that comes with the securities i.e. there's an entire prescribed sequence of steps to follow. And this is a civil matter NOT criminal.

And I don't see how anyone who borrows money to buy a house has ANY cause of action against the lender: they looked at the house they were buying (hopefully!) and they agreed on the price with the seller. As late as 2007 the home price index in the US had NEVER decreased year-on-year. No one forced them to take the loan.

And as for the myth that the "banks" made all these loans to "steal" homes from the poor...that's laughable because the foreclosed homes do not go to the banks by and large if the loans were pooled and securitized. They go into the trust which then distributes the cash amongst the different tranches according to the waterfall. This ultimately goes to the pension funds etc.


Paulson didn't do anything illegal. The investment banks *may* have crossed the line in not disclosing how the basket of securities was selected. Shorting against subprime securities didn't cause any one to lose their home. The housing bubble crashed because ultimately it was a bubble.

[Hannah Bell]

12. hmmm. tell the person who wrote the op she doesn't know what she's talking about.

Yves Smith has written the popular and trenchant financial blog "Naked Capitalism" since 2006

Yves has spent more than 25 years in the financial services industry and currently heads Aurora Advisors, a New York-based management consulting firm specializing in corporate finance advisory and financial services. Prior experience includes Goldman Sachs (in corporate finance), McKinsey & Co., and Sumitomo Bank (as head of mergers and acquisitions). Yves has written for publications in the United States and Australia, including The New York Times, The Christian Science Monitor, Slate, The Conference Board Review, Institutional Investor, The Daily Deal and the Australian Financial Review.
http://www.politico.com/arena/bio/yves_smith.html

[Pisces]

13. You are correct, however, when millions, possibly billions of loans are called on to be purchased

back, the mortgages companies closed their doors, filed bankruptcy, etc. This coupled with the fact that most were upside down ( many by half of the value) the collateral did not cover the losses.

People want to explain away the crisis in a black and white scenario. It was a perfect storm combination, no company wants to own a bunch of houses. You lose money when you foreclose even in the
best of times much less with values down and buyers scarce.

People want to imagine some evil villain sitting behind their desk plotting on how to fuck over poor people. It was the regular loan officer looking to make more money on commissions, the borrower
who wanted a bigger house and gambled on more income, lenders who loosened the guidelines to sell more loans and compete with xyz company, hedgefunds who looked for new ways to make cash.
So everyone who got something from the housing market.

[kickysnana]

14. Lenders set up shop in churches in poor areas. n/t

[leftstreet]

3. K&R

Criminals, every last one of them

:grr:

[Starry Messenger]

9. k&r

[Octafish]

10. FBI guy tried to warn them. He got transferred.

The guy must've noticed a pattern.

FBI saw threat of mortgage crisis

A top official warned of widening loan fraud in 2004, but the agency focused its resources elsewhere.

By Richard B. Schmitt
Los Angeles Times Staff Writer

August 25, 2008

WASHINGTON — Long before the mortgage crisis began rocking Main Street and Wall Street, a top FBI official made a chilling, if little-noticed, prediction: The booming mortgage business, fueled by low interest rates and soaring home values, was starting to attract shady operators and billions in losses were possible.

"It has the potential to be an epidemic," Chris Swecker, the FBI official in charge of criminal investigations, told reporters in September 2004. But, he added reassuringly, the FBI was on the case. "We think we can prevent a problem that could have as much impact as the S&L crisis," he said.

Today, the damage from the global mortgage meltdown has more than matched that of the savings-and-loan bailouts of the 1980s and early 1990s. By some estimates, it has made that costly debacle look like chump change. But it's also clear that the FBI failed to avert a problem it had accurately forecast.

Banks and brokerages have written down more than $300 billion of mortgage-backed securities and other risky investments in the last year or so as homeowner defaults leaped and weakness in the real estate market spread.

SNIP…

Most observers have declared the mess a gross failure of regulation. To be sure, in the run-up to the crisis, market-oriented federal regulators bragged about their hands-off treatment of banks and other savings institutions and their executives. But it wasn't just regulators who were looking the other way. The FBI and its parent agency, the Justice Department, are supposed to act as the cops on the beat for potentially illegal activities by bankers and others. But they were focused on national security and other priorities, and paid scant attention to white-collar crimes that may have contributed to the lending and securities debacle.

Now that the problems are out in the open, the government's response strikes some veteran regulators as too little, too late.

Swecker, who retired from the FBI in 2006, declined to comment for this article.

But sources familiar with the FBI budget process, who were not authorized to speak publicly about the growing fraud problem, say that he and other FBI criminal investigators sought additional assistance to take on the mortgage scoundrels.

They ended up with fewer resources, rather than more.

CONTINUED…

http://www.latimes.com/business/la-fi-mortgagefraud25-2008aug25,0,6946937.story

Now, he doesn't get to connect any more dots for the People.