- The formerly fabulous ersatz New York investment banks are at the very heart of this crisis
- The iBanks were up to no good
- The Subprime mortgage movement can be interpreted as an attempt to bring back the days of feudal debt peonage, where serfs are vassals of their patrons for life.
- Selling subprime mortgage backed securities can only be understood as an investor rip-off scheme.
In this piece I am going to state my mind as clearly as I possibly can, so that what I am saying cannot be be mis-interpreted in anyway. I will not soft-pedal.
Richard S. Fuld Jr and his boys at Lehman Brothers were running a confidence game that dwarfs the Enron case in magnitude. It is clear that the damages stemming from the collapse of Lehman Brothers far and away outstrip the damages of the Enron scandal/collapse/bankruptcy. I expect several key players from Lehman to be up on securities fraud charges soon, just as surely as Ken Lay, Jeff Skilling and Andy Fastow were. Just you wait for the FBI to conclude its investigations.
Those are some mighty tall words there, Dave! You got anything to back that up? How else am I supposed to interpret that data? What other conclusion can you draw on careful consideration?
It is already well understood that the subprime market was full of shenanigans. 3rd party mortgage vendors lied about borrower income and forged income documentation. Loan officers with the power to say yes or no performed no due diligence to confirm employment, income levels, residential status or citizenship. Gross sums, totally unaffordable to borrowers, were loaned out on the assumption that the value of the house would increase; a fact which has nothing to do with whether a customer can pay off the loan month to month. Explosive ARM loans were issued with teaser interest rates, sold at high closing costs, and then massive increases in interest were encounters 90, 180 or 360 days later. These interest rate adjustments often turned onerous loan payments into completely unpayable payments. Then you find the "interest only ARM", a super-toxic loan for speculators in which you never pay the principle, only an adjustable rate of interest on the debt. By very nature of the legal structure of the deal, the loan can never be paid off over time. Only a lump sum or bankruptcy ends the loan; all or nothing. Then you have 40 and even 50 year terms for fixed-rate loans. The quantity of interest you would pay on such a long loan is truly astronomical, often making the final cost of the house 3 times the base sales price.
It is clear that groups like Lehman brothers and Bear Sterns kept pushing the envelope regarding just what constituted acceptible loan terms. The terms for the buyers kept getting worse and worse. What can you say about a loan structured in such a way that it cannot be paid off? What can you say about a loan that would make a plumber pay $1.5 million over the course of a 50 year loan on a small rat-infested townhouse in Queens? What do you say about a HELOC? A Home Equity Line of Credit essentially issues a borrower a credit card equal to the perceived amount of potential equity in the house, and then encourages them to go buy groceries, gas and HDTVs, all of which jack up the mortgage balance. This is nothing more than an attempt to re-institute the system of debt-peonage and feudal serfdom; a situation where their homes and land are perpetually owned by the feudal lord. This is an attempt to make every man a financial slave.
The only problem is that the U.S. Federal government has limits regarding how far you can pursue a guy in bankruptcy. I should mention in passing that the financial industry tried to modify our Bankruptcy law many times in the run up to the crisis. They had some ugly successes. Ultimately, they weren't able to clamp people in irons, inside debtor's prisons, in an attempt to force repayment. Thank God for that much.
Worse, groups like Lehman Brothers and Bear Stearns clearly understood that these loans were hot potatoes. The second act of their business was to chop up these mortgages into little 'security instruments' or bonds, and sell this right to be repaid to ordinary rank-in-file investors (including guys like you and me). These were high risk instruments, designed to off-load the risk from Investment Bankers to others. Open up these bonds and you would find a motley collection of bad subprime loans. Good security for the bad bankers. Bad security for the gulible investors. Bake a hot potato in the Microwave and then toss it to an unwary investor. You charge him for the hot potato and you burn his hands also.
I still have no idea why Standard & Poors would give these shit-bonds Tipple-A ratings. Perhaps it had something to do with the Mortgage Default swaps issued by Bear Stearns and AIG... But this is a story for another day.
What should I conclude when I see an organization like Lehman Brothers borrows billions from Citigroup et al to issue subprime loans, only to turn around and sell these rubbish loans as shit-bonds to benighted investors? The scheme is clear:
- Don't risk any of your own money
- Borrow from groups like Citigroup
- Pocket large fees from originating mortgages to people who can't get them any other way.
- Give those subprime borrowers money from institutions like Citigroup
- Don't hold the hot-potato. Chop it up with other hot-potatoes and sell it as a security to benigted investors.
- Get Standard & Poors to rate your bonds as Tripple-A when they are not.
- Get AIG to ensure the bonds.
