Friday, November 19, 2010

Revealing "the devils" behind the financial crisis

A fascinating interview with the authors of a new book about the recent financial crisis sheds some light on who is the blame for the economic turmoil that the US and the rest of the world are still struggling to overcome (see Ireland's bank takeover plan). Bethany McLean, who co-wrote The Smartest Guys in the Room about the Enron debacle, teamed up with New York Times business columnist Joe Nocero to write All the Devils are Here: The Hidden History of the Financial Crisis.

McLean and Nocero were on the PBS NewsHour last night to talk about the roots of the crisis, and they said that -- to no one's surprise -- both Democrats and Republicans were culpable for the lack of regulation and foresight that led to the housing crash. They also said a number of other interesting things, including that the ratings agencies (Moody's and Standard & Poor's, among others) were at the top of their list of culprits most responsible for the crisis.

McLean also said that she "started this book with a bias toward personal responsibility," but found out the extent to which:
...these loans were sold; they weren't bought. And one of the most telling moments were these internal documents from Washington Mutual, one of the big subprime lenders, around 2003 talking about how to get consumers who really wanted safe 30-year fixed-rate mortgages to take out these dangerous option [adjustable rate mortgages] instead ... how to sell those to people, and how to confront a consumer who said, "But it doesn't feel right to me. I want to pay back my mortgage every month." ... How do you get these people to take out a risky mortgage instead? You told them that home prices could only go up. And the reason Washington Mutual wanted to sell these option ARMs, instead of the 30-year fixed rate mortgages, is that Washington Mutual could turn around and sell these to Wall Street for a lot more money than it could sell the old 30-year fixed-rate loans.
Nocero adds, "I was stunned, in the reporting of this book, how much subprime was about predatory lending." He notes, also, that most of these transactions weren't for new homes, but for "cash-out refinancing" -- people remortgaging their homes in order to use the money the could get. "And that," said McLean, "enabled consumer spending through the 1990s and through the early part of -- of this decade."

Maybe the most telling, and most disturbing points, the writers make are at the end of the interview, when McLean says that Wall Street and corporate America saw that cash-out refinancing was a way for them to reap billions: order to keep the U.S. economy going, you had to keep consumer spending strong. In order to keep consumer spending strong, you had to have consumers whose income otherwise wasn't keeping up have a ready source of cash. That was cash-out refinancing, by using their homes as piggy banks, and no one wanted to stop that party.
The party may be over for American homeowners and consumers, but big business and the financial sector are still laughing all the way to the money trough.

1 comment:

Mid-Life Progress said...

Jim! This is what I have been saying all along! The government needs to come down on the housing and mortgage industry as hard as it did on Wall St., if not harder. The reason they won't - is because they were all in collusion. "Let's all pretend that this is perfectly normal to give 500k loans or higher to folks who will never be able to pay it back. Let's just give them these massive lines of credit that they will pump into the economy."

The major fail on that - is that once folks rip through the equity line and lose their jobs and are unable to pay back anything...the impact on the economy is exponentially higher with little if any hope of recovery for the borrower.

This is predatory lending at it's most ruthless!