CURMUDGEONS CORNER: The Two Greatest Disasters

The two greatest disasters of the 21st century remain tied tightly together by common threads. The first depression of the new century and the worst oil deluge in US history both featured corrosive and explosive greed aided abetted and enabled by a deadly combination of incredibly bad reporting and incredibly willful ignorance.

They also share a half life much longer than anyone now expects. If you really expect the money in that 401k to come back take a look at Japan, once home of the most expensive real estate in the world with prime Tokyo real estate going for close to $100, 000 a square foot and 100 year mortgages on the menu. The Tokyo stock market peaked just before New Years day in 1990 just short of 40,000. Now, 20 years later, the Nikkei in Tokyo has never come close to recovering and trades at under 10,000 and some prime property plummeted to 1 percent of its 1980’s peak value.

Oops. Ouch.
 
And then there is the mega-giant undersea oil gusher in the Gulf of Mexico, crippling the Gulf Coast, threatening the whole East Coast. You remember the early “reporting?” The crippled well wasn’t leaking significant amounts, then it wasn’t leaking much. It crept up to 5000 barrels a day, 10,000 then 20,000 up 60,000 then a million gallons a day but still words like “leak” and “spill” dominated the media. You spill a cup of coffee. This ruptured well spewed out millions of gallons of crude oil a day for almost 90 days. But it took months for the reporting to catch up with the scope of the disaster. Dinosaurs will walk the earth again before the Gulf is really clean. Meantime BP and the other oil companies keep collecting your money at the gas pump, pushing up prices every chance they get, and they keep collecting millions in government subsidies.
 
The catastrophic crash of the new century hit the world economy like a tsunami destroying everything in its path while people like then Treasury Secretary Henry Paulson insisted “the fundamentals of the economy are sound.” But most of the time watching TV news and reading the newspapers you would think it was all a mortgage meltdown, caused by a few people buying houses too big for their budget, and getting the rest of us in trouble. As far back as 2008 a New Times report on mortgage mover and shaker Wamu suggests snorting meth to speed the flow of mortgage applications was tolerated. The business end of this crisis came fueled by drugs, money and a cute little tool called YSP.
 
YSP stands for yield spread premium but it translates as “you screwed, people.” What it means is that the mortgage broker helping you get a loan got paid more for lousy loans than good loans; the higher your interest rate and pre-payment penalties the bigger the fees for the broker, a kickback from the bank for fleecing unsuspecting borrowers. The consumer never had a chance.
 
The mortgage meltdown actually came close to the end of the world as we know it and amounted to the greatest transfer of wealth since someone conned the Indians out of Manhattan for a handful of beads. 
 
A handful of books will give a frightening glimpse into the real workings of the greatest scam of the 21st Century; how the banks and brokers fleeced the whole world twice, once with the bubble and once with the bailouts, a look at how close the world came to collapse, how it really happened and how dangerous it still is. We should have used the bailouts to pay off all the mortgages and let the people the people start again and the corporations rot, instead of the other way around.
 
The Books: Too Big To Fail by New York Times reporter Andrew Ross Sorkin, Chain Of Blame by financial journalists Paul Muolo and Mathew Padilla, I.O.U. Why EveryOne Owes Everyone And No One Can Pay, by John Lanchester, Busted by New York Times reporter Edmund L. Andrews, The Quants by Wall Street Journal reporter Scott Patterson and Confessions Of A SubPrime Lender by former mortgage company president Richard Bitner.
 
If you only have time for one, start with IOU, which will give you the Steven King chiller thriller of the end of the world as we once knew it.
 
The unstated key to the whole concept of Too Big To Fail is that the rest of us are too small and insignificant to save or even consider. Billions to bailout the banks and the brokers but not even pennies for the people. Remember, the people provided all the money in the first place. The giant piggy bank the big pigs broke into to finance their life of wealth and influence feasted and grew on the pensions, the savings, the mortgages, the credit cards, the car loans, the 401k’s, the investment accounts and even yes the taxes paid by the people too small to save or worry about, too small for unemployment benefits, health insurance, or anything else. The people like Warren Buffetts’ famous secretary who paid taxes at a higher rate than Warren Buffett himself.
 
Plus the new mortgage is called cash. Ask any real estate agent who is actually selling houses and you will find an astonishing number of buyers are paying all cash. The banks and the brokers are against regulation for themselves…but applying for a mortgage has become a nightmare.
 
The other key connection between these two great disasters, the eco-nomic neutron bomb that blew away the middle class and left the banks standing by propping them up with bailouts, and the drilling disaster in the gulf turning tar balls into the new sand, can be found at the source.
 
Man-made disasters are killing us, not forces of nature. These earthquakes or hurricanes or floods. This is not even the Titanic, unless the same people built the iceberg as built the ship. Compare these disasters to car crashes. Not just any car crashes, but the ones we all remember from high school, where a bunch of teenagers with too much to drink and no where near enough skill, experience and knowledge try to race a big, powerful borrowed car around a 30 mile an hour turn at 100 miles an hour. They end up killing themselves and the innocent people they crash into after losing control and hitting a telephone pole. People just as dangerous but not as innocent as those teenagers took control of our banks and brokerages and drove our economy, the whole world economy, off a cliff. And the thing to remember is the people who did it are still rich and we are not.
 
Some of these out of control teenagers earned the nickname Quants and many of them became superhero geeks. These were the card counters in the casinos of Wall Street, the memory magicians calculating odds changes as the cards revealed themselves on the blackjack tables of the world economy. In his definitive book called simply “The Quants” Wall Street Journal Reporter Scott Patterson uses a quote from the stalking bear money manager Jeremy Grantham to parcel out a good piece of the blame for the massive meltdown “The Story So Far: Greed + Incompetence + A Belief in Market Efficiency= Disaster.”
 
Patterson provided his scathing characterization of the greedy gobbling pacman games Wall Street played with mortgages and CDO’s.
 
“Like crack cocaine, it was addictive, and ultimately ruinous.” Except this time the addicts got rich and stayed rich while the rest of them got the cokehead crash.
 
For the best read on captains of industry and government scrambling to re-arrange the deck chairs on the Titanic, the very ship they had steered blindly but with deadly accuracy right into the biggest iceberg in the world, the credit freeze that killed the world economy, get your hands on the instant classic, “Too Big To Fail” by the New York Times reporter Andrew Ross Sorkin. It is so up close and personal you can hear then Treasury Secretary Henry “ Hank” Paulson vomit.
 
“The Chain of Blame” by two financial journalists, Paul Muolo from national Mortgage News and Matthew Padilla from the Orange County Register provides a rogues’ gallery of the stars and players in the niche of the mortgage market that mutated into what some called the subprime mortgage boom and later bust. The book may be episodic and at time repetitious, but it provides the same kind of insider view of the men and the businesses who helped create the flood of mortgages the banks and the brokerages needed to fuel their gigantic, greedy money spinning machine. The book makes it frighteningly clear that this business was never about creating mortgages for house and home buyers. It was all about creating massive quantities of mortgages to provide the raw material needed by banks and brokerages to slice and dice and leverage and package and repackage skimming off fees every step of the way as they brewed up a toxic soup of financial instruments to be traded in the dark.
 
What became known as the subprime industry should have been called the big bank profit puffing machine. It may have grown up in and exploded out of Southern California but, as Scott Patterson noted in his book “The Quants “ more than 20 of the top 25 subprime mortgage lenders were “either owned or financed by major Wall Street or European banks.” They had no interest in the homes or the home owners or the future of the mortgages. It was said if you could fog a mirror you could get a mortage and the founder of one appraisal company said “ I think if you were dead, they would still give a loan.” This was strictly the business of creating a blizzard of paper as disposable fuel for a blizzard of profit.
 
Jon Lanchester sums sit up brilliantly in “ I.O.U. Why Everyone Owes Everyone And No One Can Pay. Thanks to this financial frame up and flim flam game “We have been left with these grotesque hybrids, privately owned banks which are able to generate boggling profits because their risks are underwritten by the taxpayer. It is a 100 percent pure form of socialism for the rich.” The end result, again from John Lanchester, “A huge, unregulated boom in which almost all the upsidewent into private hands, followed by a gigantic bust in which the losses were socialized.” In other words the rich got super richer and the rest of us got super screwed, a perfect redistribution of wealth, take from the masses and give to the rich.
 
For an even more down and dirty look at the nitty gritty of the boiler room mortgage factories that shoveled coal to get the little fires going that the big banks and brokers turned into toxic nuclear waste you can turn to “ Confessions of a Subprime Lender: and Insider’s tale of Greed, Fraud, and Ignorance” by Richard Bitner. This very anecdotal book focuses on loans gone bad, borrowers gone bad, brokers gone bad and underwriters gone bad. Bitner calls the collapse of the mortgage market “a perfect storm” and predicts that “the full impact…won’t be known for years to come.” But this is definitely a view from the trenches with little recognition of the fact it wasn’t really the mortgage market that collapsed. Rather it was the house of cards, the blizzard of phony paper and phony paper profits that brought down the whole world economy. The mortgage market certainly helped feed the frenzy but in the end when the music stopped the mortgage market amounted to collateral damage and 98 per cent of us were innocent victims while 2 per cent of us got filthy rich and remain that way. The fact that the WAMU (JP Morgan Chase) loan brokers were creating phony documents and paperwork to push through loans for unsuspecting borrowers while doing drugs is at least instructive as to what was up between mortgage brokers and the banks.
 
But probably the book with the widest sense of prospective , including an incredibly rare and humble plea of guilty as well as a carefully reported view of the big picture would be “Busted, Life inside the great mortgage meltdown” by New York Times reporter Edmund L. Andrews. Andrews’ reports on the worldwide mortgage meltdown while admitting to and chronicling his own personal and private mortgage meltdown. He wrote the book while falling behind on his own mortgage payments and headed full speed toward foreclosure.
 
Andrews’ final chapter is slugged correctly and presciently “God help us all.” One can only hope so because so far the government is helping the bankers and the brokers with taxpayer bailouts for the “Too Big to Fail” and no one is doing anything for the rest of us.
 
Andrews comes up with some pretty astonishing figures “ the fact that the United States had just lost $12 trillion in wealth as a result of the combined collapses in housing prices and stock prices.” A few pages later he notes that this staggering loss “ was almost as much as the nation’s 2008 gross domestic product: $14.4 trillion.” Losing a whole year of the economy is bound to have bad consequences, suggest Andrews.
 
Like maybe the closest thing to the great depression since 1929? Just where did all that money go? He does quote a few brave souls who suggested that instead of just giving money to banks maybe some bailout money should go directly to helping people with mortgages. But as Andrews said Secretary of the Treasury “ Paulson wanted none of that.”
 
The only failures they wanted to help were the one that were to big to fail.
 
The one plan no one considered was to pay off all those bad mortgages and mail deeds free and clear to the homeowners. It would have been a cheaper and more equitable than bail-ing out the guilty and letting the victims suffer.
 
How will it all end? For most Americans every day with another chorus from Tennessee Ernie Ford “another day older and deeper in debt. St Peter don’t you call me cause I can’t go. I owe my soul to the company store.”
 
For the privileged few, the geniuses and bankers and brokers, the secret teenagers needing all the instant gratification they can get, the ones who drove the economy off the cliff in a company car, they banked that $12 trillion dollars so they can buy another MacMansion at half price and tell America’s corporations to layoff millions more people and then tell congress not to extend unemployment benefits. It’s not just that they want more. They want everything.
 
And we, the rest of us, can have the tar balls on the beaches of the Gulf Coast and all the toxic seafood to go with the toxic assets the movers and shakers used to take our money and put it in their pockets.
 
So far the opening decades of the 21st century promise to be a dirty and dangerous ride.

 

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