reply to post by mbkennel
OK. the gent who signed a document with full knowledge that he would be over his head with normal cash flow, thinking that he would be able to pull
equity out of the house through increased value to cover the difference and then went belly up is not a criminal, he's just a fool. Fine, than he
should be sued civil court and his house taken away and that is exactly what happened.
This business is all about one thing and that is this nonsensical "American Dream" of home ownership.
- The Bankers were creating instruments that were legal to create. Did some of them push the envelope and break the law? Sure and a number of
them went to jail. 99% of them however were doing something not only legal, but supported by the general public and the government. The public
because they wanted to ride up this housing bubble and make money and the government because they want to spout their ability to create and sustain
the American Dream.
- Why were the rating agencies allowed by the government to only include the top two tiers of debt bundled in a CDO and base the rating on those,
ignoring the lower tier of trash debt? Because if they included the lower tier the securities would not be AAA, they would be in the B range and
nobody would buy them, putting a stall on the housing boom. Did the homeowners care about that? No, all they cared about was the easy money that
allowed them to continue to ride the bubble. Should they have known? No because the government should have insisted that adquate transparency was
in the market and they purposefully reduced that transparency.
- They also did not want the lower tier scrutinized because it would expose the fact that the Community Reinvestment Act was a sham and that the
government was forcing the banks to make bad loans. What would that show? In many cases that minorities in this country were simply not financally
equipped to become home owners, something no politician wants to explain. They don't want to talk about it because there is no solution to the
problem, at least not a short term one. What happens if that discussion happens in the open? Dudes like Jackson and Sharpton march on Washington
to extort more handouts from the government. Hell, at least when the folks who could not afford a house got a house they went to Home Depot for a
few gallons of paint and put some money into the economy - hey its all good, as long as the real truth is not being told.
- The housing bubble generates great statistics like housing starts, first time home ownership and the like. The government loves to have those
statistics on their watch. Hell, they are just looking at the next election and all of these happy new homeowners are great voters. Who cares what
happens 5 years down the road, I'm not planning to run again and even if I do, this business will be such a mess and so much blame to toss around
I'll get elected anyway - think Barney Frank and Chris Dodd.
- To suggest that the Harvard educated trader should have dug into the contents of the CDO and is somehow liable in this mess displays a complete
ignorance of how investment banks work. It is like saying that a Harvard educated doctor who prescribes an FDA approved drug that was either
purposefully or inadvertainly tainted by the manufacturer is liable for the harm done to his patient. The doctor is certainly not on the hook to
perform a chemical analysis of each dose of each drug, or do you think he should be? In the same manner and investment bank has a distinct
manufacturing arm and a sales arm. In most cases those groups have no interaction and in some cases there are legal separation of duties that are
put in place to purposefully abstract the trader from the contents. The trader is selling AAA just like the doctor is perscribing FDA approved.
All he knows is that his product is like Viagra - its selling like hotcakes and thats great because the more of a market there is for it the more he
- The public, many of which were in a buying frenzy to pull cash out of homes pushed up the demand on these instruments. The government, anxious to
have a happy, home owning public relaxed the standards and ignored pleas, many of those pleas coming from the investment community and they forced the
banks to continue to create liquidity to further fuel the bubble.
- The government, having placed capital requirements on banks that were unsustainable based on the types of debt they were being forced to take on,
further forced the banks to become increasingly creative in thier methods of packaging debt.
- Again in 99% of the cases, the banks were doing what was not only legal but strongly encouraged by the government and supported significant demand
by the home buyer who wanted his piece of the American Dream.
What do you suppose would happen if a major banker stood up publically said in a very visible way, "look, this situation is a sham. The government
has put in place policies that require us to lend money to folks who can not afford the loans. We are being told that if we don't loan money to
these under qualified folks we'll get redlined and be put out of business. So be it, red line us." There would be outrage and headlines like
"Bank executive says no to loans to blacks" "XYZ Bank refuse to service poor neighborhoods" Stuff like that.
The next day there would be a march on Washington led by Mr. Jackson and Mr. Sharpton.
Finally, when this business blew up, those evil bankers went to the government and asked for the "Mark to Market" requirements be lifted at least on
a temporary basis to enable them to not foreclose on their clients. "Mark to Market means that the bank has to value the debt at the current value
of the product, in other words, if a house is currently appraised at $300K but has an outstanding debt of $400K the bank is forced to categorize that
as a bad debt on their balance sheet. The capital requirements placed on banks means that they can only carry a certain amount of those loans on
their books (thanks to the FDIC). What that meant is that a gent who had paid his loan every month for 15 years who lost his job went to the bank
and asked them to help him out, the bank said "no. You are in default on this loan. I can't refinance it (due to market to market rules) and
I'm going to have to foreclose on you. Now once we have foreclosed, we can do business, because I've got the debt off my balance sheet. Lets talk
about a $300K loan - Oh, sorry, but I can't give you a loan because you've foreclosed on a house"
Its a messy circle with equal blame to go around