Tag Archives: housing crisis

The Time to End Washington/Wall Street Bank Cronyism is Now!

My career transferred me to over twenty locations across the U.S. and gave me an accidental insight into regional boom/bust economies. Three times during the 1980s, I lived through regional housing booms that went bust. Houston experienced a boom/bust cycle tied to oil exploration. Hawaii’s housing prices doubled and then crashed in parallel to Japan’s economy. And New England’s regional market spiked and crashed tied to the baby boomer stock market bubble. During this curious New England cycle, I learned an invaluable phenomenon that would later allow me to time the Great Housing Ponzi and to cash out at the height of the market.

At the peak of the New England housing boom, apartment building owners found that they could turn any old dilapidated apartment building into condos and monetize them for high returns that far exceeded the profits they would otherwise receive if they continued to operate their buildings as rental units. Right after this point in the cycle, housing prices increased beyond what two income families could afford. The market turned and speculative investors were caught holding high priced investments. Over the next few years, housing prices dropped precipitously.

Having travelled extensively for my companies, I chose in 1999 to instead move my family to Florida to pursue my entrepreneurial dreams and to raise my growing family. I bought a home in 2,000 in the early phase of the real estate bubble, and by 2005, my home was now “worth” double what I had paid just as apartment buildings began to convert to condos. Having seen this pattern before, I cashed out at the peak. Over the next several years, the housing market softened and slowly turned south.

Just as I intuitively knew a slow housing crash was beginning in 2005, America’s banks knew well before the debt crisis “erupted” in 2008 (In which they claimed they had to be rescued immediately or that America would implode) that the results of their decades of greed was now barreling in slow motion toward the American people. The banks had also devised strategies for how to best extract themselves from the effects of the coming crisis well in advance. Yet they continued their loose mortgages and credit default swaps unabated for another three years after 2005 even after the housing peak turned. Bankers knew that America’s impending crisis was building to a historic crescendo, yet they continued to line their pockets with frenzied last minute greediness.

Why was it that bankers continued such damaging policies for another three years as they rushed to consolidate into “too big to fail” entities in preparation for the government showdown? Because they knew that short term bonuses had never been higher, that the gravy train would soon end, that most all of the other banks were complicit in providing global cover for their schemes to cash in on last minute deals, that too many banks were in the same predicament for the U.S. government to let them all fail at the peak of the crisis, and that the revolving doors between the banks and the financial regulators in Washington would ensure the bailout that would eventually occur, just as it had for the previous savings and loan bubble. Banking’s hearty participation in America’s financial democracy through years of election funding had purchased a socialized bailout that would protect the downside of their engorging loan profiteering.

Could the Federal government have chosen another path, more palatable to the American people, and just as viable as the one that Paulson forced on the American public, throwing $700 billion TARP dollars immediately into the coffers of big banks with no strings attached? Of course they could have. Certainly, restrictive actions could have been taken well before the crisis erupted. However, even in the midst of the manufactured crisis, a more dispassionate Washington could have chosen a better alternative.

In the heat of war, as waves of enemies are swarming over the embattled lines of defense, most every soldier is tempted to jump out of the trenches and run away from the immediate danger. To do so, however, would be to jeopardize every other soldier on the line. It is the commanding officer’s duty to instill the courage needed to overcome this dreadful fear and to hold the line. And if the line cannot be held, an orderly retreat is a tactical move that saves many more lives than a chaotic break of terror.

What the banks did in the midst of the growing crisis was the equivalent of staging a chaotic retreat. What Paulson could have done was to infuse capital into Lehman Brothers in such a way as to signal to the other banks that they would not want to take the painful medicine that Lehman Brothers would endure and that they should instead go back to the line of battle to defend the banking system while a more reasoned, thoughtful strategy was developed. But the banks knew a potentially radical change of politics was coming and that the risk of a depression era bank restructuring as punishment for their greed was too great a risk to take. And thus they broke the lines and ran.

Rather than force the banks to hold ranks to protect the flanks of every day Americans in the trenches, Washington chose instead the path of crony bank asset protection. In so doing, Washington set in motion the long march of the inevitable contraction of the American economy. Subsequent choices for bailouts, stimulus and quantitative easing that Bloomberg News quantified as an additional $12.8 trillion in spending, lending and guarantees, stabilized Washington’s banking benefactors yet added to the eventual severity of America’s slow collapse.

America can reverse this crony Washington/Wall Street strategy and I expect that Occupy Wall Street may be a catalyst to force a reversal. Yet, the damage that has already been done for having allowed Washington’s Cronyism for the past three years cannot be undone. Jobs have been lost. Businesses have collapsed. Credit has been ruined. Homes have been taken. Instead, America’s path of reversal will be steeper than had a fairer path been chosen. However, each day that we delay a course correction just deepens our eventual starting point for recovery. The time for action is now.

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The Housing Crisis “Who Done It?”

As I listen to discussions about who or what was responsible for our current housing crisis, they seem to invariably disintegrate into arguments about which political party was responsible for the mess we are in. Commenters point to one or more specific milestones as the very reason. I am somewhat as simplistic in that I suggest the overwhelming pull of globalization and the capitalistic opportunity to invest in China that created too much of a temptation for investment banks. As a result, they worked for thirty years to drain America of its capital through any way possible including the housing ponzi. My points include:
•Prior to the Great Depression, mortgage securitizations created excessive speculation
• Laws were passed to attempt to separate loan originations and investments
• China’s opportunity created great capital demand starting in 1978
• Investment banks began extracting capital from America including using mortgage activities
• Investment banks made commercial banks willing accomplices by purchasing liar loans, eliminating commercial bank risks, creating the final capacity for the Great Housing Ponzi

However, trying to point to any one milestone as the culprit is just too simplistic. Trying to deny the culpability of any milestone is just as simplistic. How much blame for the housing crisis should be placed on pooled Ginnie Mae mortgages in 1970? What was the influence of Freddie Mac’s REMICs in 1983? How did banking law amendments in 1982 that encouraged private banking securitization impact the future Ponzi, or the Secondary Mortgage Market Enhancement Act of 1984, that put private banks on equal footing with Fannie and Freddie with securitization, affect the crisis?

We know that the Home Mortgage Disclosure Act of 1975, which outlawed redlining, was a factor in influencing subprime loans and that CRA 1977, which added affirmative action to subprime loans, influenced later lending practices. Yet, are we to say they had no influence in the later scandal?

Some analysts deny the existence of President Clinton’s National Home ownership strategy which, with changes to CRA, set up soft quotas in lending to underserved communities, yet his efforts led to an 80 percent increase in subprime mortgages. Did the addition of this new demand have any influence on the housing Ponzi?

In 1994, Blathe Mathers of J.P. Morgan invented the credit default swap to pass the risk of the Valdez oil spill to EBRD. This instrument, invented to subdue a perceived liability of Exxon was shortly after applied to the mortgage industry. In fact Clinton’s subsequently supported legislation that allowed subprime loans to be securitized in 1995 provided banks with much needed cover to remove these loans from their balance sheets into the investment banks arena. Did either of these milestones not have an impact?

Certainly CRA forced commercial banks to take on risky loans that would never have otherwise been taken. However, with the introduction of resale, securitization, and CDSs, these subprime loans became great money makers for all, so much so that in the three years after 1995, the number of banks in subprime lending increased from 10 to 50.

Did the dot com bubble of the late nineties contribute to an overall wealth effect that caused excessive loans including mortgage refinancing? Seems evident. Did GLBA have an impact on accelerating the globalization of securities and swaps? The data supports that. Did the Fed’s actions of dropping interest rates from over 6 percent to 1 percent in the years 2000 to 2003 contribute to the run up? Um yeah. And what about all the buyers of these securities, they seemed inordinately good deals yet organizations as large as AIG did not seem to understand the complex risks they were taking. Could they have slowed the Ponzi’s pinnacle if only their financial experts understood what risks they were taking? Of course.

When I hear the myopic and tinny ringing of political extremists pointing to one side of the aisle or the other as scapegoats for a debacle decades in the making that included one contribution after another, I sense a slight superiority when I settle back on my simplistic answer of “the investment bankers done it.”

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