Saturday, September 12, 2009

A Homeowner's view of the Financial Crisis

In 2008 I was naive enough to invite offers for auto insurance on a website and soon I was getting 10-30 phone calls a day by people trying to sell me a mortgage (yeah, I know it was them).  I guess my web invitation was enough to qualify for the loophole Congress injected into the “No Call” law on behalf of the banking special interest lobbies so everyone on the planet could contact me.

Now that over 15% of mortgages are in default, I wonder if it’s time to redress the sloppy job on the “No call” rule that Congress made in the first place and get consumerists the heck out of our living rooms.  The law should be simple; no calling.  It’s what the public wanted.  Under what nuanced world view is the current law not a breach of the Constitution?  I wonder how many high risk mortgages could have been avoided if Congress would have just done that one simple thing right when we asked them.

Remember, these calls aren’t just from the local PTA asking for picnic money.  These calls are products of advanced marketing techniques; tested, focus grouped, nuanced, and statistically validated.  If you’re going to convince someone to hand over the biggest investment of their lives to a complete stranger, using a debt instrument they don’t understand, you have to have some serious shtick going on.

I listened to a few of those calls just to listen to the sales job.  What really surprised me was that so many of these mortgage instruments were legal.  It took me over an hour to coax the real terms out of one broker, and I have a Masters degree in Finance.  It turns out he was selling a principal only payment, interest back loaded, with an ARM reset at prime plus three after one year, and every few years after that.  I had to suppress my laughter at all the different obfuscations and assurances he had scripted, especially when his misleading lesson on prime interest rates kicked in, all designed to assure me that I was going to be fine.  What really sobered me up is most people wouldn’t even know what questions to ask.  And to make it worse, lots of folks still have a sense they can trust their banker, given fiduciary duty and all.
It’s at least of some interest to know that virtually all these debt instruments are illegal in other G7 nations.  They’re too complex for such a huge investment.  And foreign governments don’t guarantee their nation’s mortgages like Barney Frank and the government did through Freddie and Fannie.  I guess the natural ambitions of 27 year old Wall St. millionaires who never had a real job in their life just naturally kick in when the federal government is guaranteeing their work.

In all this mess it still wouldn’t have been as bad if the banks holding Grandma’s nest egg hadn’t found a way to increase leverage from 12 to 30 or more.  In countries like Canada not one bank has gone bankrupt for the simple reason they don’t allow all those fancy instruments and extreme leverage.  Simple is better in banking.  After all, they have our money.  And how did the elites get so nuanced that they figured they could consign different capital requirements for different loans through the Basel Accords?  I thought loans were already risk weighted in the first place.  Sounds like crony capitalism and elitism to me, and too smart by half.

Speaking of simple, it seems we’re so smart we can take a collage of mortgages from NINJA (no income no job or assets) through AAAA and truss them all up into instruments with a higher average rating than we started with.  Then we can sell them to Fannie and Freddie and buy them all back again at even higher ratings.  While any 8th grade math student would scratch her head about where the NINJA variable went, I suggest those securities are beyond not only the common sense of hard working folks on Main Street, but also the slick financial PhD wizards who dreamed them up.  The financial collapse is proof of that.  What good are they anyway?  They just encourage higher debt leverage and consumerism, and that’s not how the markets I know and love work, or how real economic value is created anyway.

If I were king for a day I’d simplify the whole mortgage business again, relying primarily on local lenders that know the communities.  It would necessarily re-purpose some of those Wall Street brains without a lick of common sense or sense of decency to actually produce something constructive for a change.  Of course we had a chance to let the market do exactly all of that without appointing me king, but somehow the politicians saved them all with our tax money.  I’m of the personal opinion that our economy would not be any worse off now if we didn’t have all those Wall Street folks running up the price of oil and corn and copper in the derivatives market.  And if the government insisted on injecting liquidity, it could have loaned dollars to the community banks that stayed out of trouble in the first place.

As to all the off Balance Sheet securities, I guess I’m from the old school.  Effective markets depend on transparency and information, so if it can’t be measured and put on the Balance Sheet, why is it legal?  Sounds like a crap game to me.  I noticed the FASB were all set to return to GAAP sanity again, but now it looks like their plans are on hold.  You can guess why.

Let’s face it.  In a different world those politicians and bankers were called snake oil salesmen, and they would have been ridden out of town on a rail.  A lot of what the government is doing is just plain illegal in the private sector, and for good reason.

Every recession including the Great One has been caused by the unholy machinations of politicians, the Fed and bankers.  By the way, it’s economically impossible to have a recession without the Fed and the government.  They’re all out of control.  It’s that simple.

No comments:

Post a Comment