November 17, 2008
THE RECKONING: Two Peas in a Pod
The reckoning? There will be a judgment one day; believe that. Grifters in China selling some magic powder that
will turn any liquid into a milk-like high protein potion. Con men on Wall Street
and advertisers on Madison Avenue selling people things they don’t need. All because of greed for easy money. The US and China; democracy,
communists? They are becoming two peas in a pod.
Both without moral foundation. Unethical criminals come in all shapes
and sizes.
A little over a week ago, the Washington Post ran a story detailing how
food supplies all over Asia had become contaminated despite the warning from an earlier pet food scare (“Retracing the Path Toxic Powder Took to Food in China,” November 8, 2008). According to the article, it was an open secret in
rural China that almost all dairy farmers and suppliers of milk that ended up in baby formula all over the continent was hopped
up with melamine. It was sold by shady drug dealer-like characters driving BMW’s
and Benz’s.
So when people ask me why I have begun pushing urban gardening, locally-grown food, and making my own yogurt and
cheese, among other things, when I explain it they get it much quicker now.
What does this have to do with Wall Street you ask?
The New York Times has been running a series on the origins and ramifications
of the situation in our financial markets caused by the bursting of the housing bubble.
The series, called “The Reckoning,” has been incredibly revealing.
As I’ve watched the “financial crisis” unfold with a series of government bailouts approaching
$2 trillion, and the revelation last week that the Fed has made another $2 trillion in secret loans (Bloomberg News article) I am struck by the misinformed tone generally amongst the public and the media debate about these admittedly complex issues.
More troubling, is the tendency of some to blame all of it on homeowners facing foreclosure who have been delinquent
in their mortgage payments and Democrats in Congress who pushed for more loans to low-income and minority buyers. The truth is, there's plenty of blame to go around, and it all hinged on one character flaw: greed.
And there is no doubt that people should honor their financial commitments.
But, just how did we get to a juncture where the people who can least afford it are paying the highest interest rates
and have mortgages with large balloon payments?
Ofentimes you have to look at the minutiae to really see what’s
going on.
First of all, forty years after the post-riots Kinsey Report, and despite the newly elected African American president-elect,
we live in a society where it is acceptable for minorities with equal incomes and credit histories as their white counterparts
to often only be approved for loans with higher rates than whites in the same cohort.
Just Google “discrimination loans minorities” and you will find a plethora of stories and reports on
it. The Kinsey Report summed up the situation like this: America is “moving toward two societies, one black,
one white—separate and unequal.” Many things have improved, but “redlining”
(if you don’t know see Wiki) of minority communities is still continuing.
In the second article in the series; "Agencies '04 Rule Let Banks Pile Up New Debt" (October 2, 2008), the reader is told how the Bush SEC was completely asleep at the regulatory switch.
A few weeks later, in a piece entitled “Building Flawed American Dreams” (published October 18, 2008), the Times addressed the issue of whether
programs designed to increase minority homeownership caused the current situation. What
is clear from the article is the following.
The Clinton Administration complied with the home building industry (before the SEC regulatory collapse) in lowering
the regulatory oversight of government programs designed to help the disenfranchised get homes. While the pretext was altruistic, the facts belie this.
What we have seen is that roadblocks were removed so that wealthy developers and mortgage company executives and
salespeople could make more money while housing prices soared through the roof. The
government official who green lighted the changes went on to later serve on two of the boards of the very same companies that
benefited most from the deregulation (earning seven figure income). He also profited
from a joint venture with one of these companies to make even more. Who was he
really looking out for? What happened to the ethics guidelines and why aren’t
they more stringent?
One of the executives that worked closely with former HUD secretary Cisneros has admitted to illegally back-dating
stock options just like many other prominent executives. If this nation values
honesty, why aren’t more white-collar criminals going to jail? That’s
another story.
Earlier, in “Pressured to Take More Risk, Fannie Reached Tipping Point” (October 4, 2008), the Times reported that while Congress had in fact pressured
the government sponsored company; the real driver in its decision to buy more and more risky loans, long after the dangers
had become publicly known, was their fear of losing business to Wall Street firms that were now packaging their own mortgage-backed
securities. Thus, the real reason was that Fannie Mae’s and Freddie Mac’s
executives wanted to protect the bottom line in an effort to enhance the firms’ stock prices which translated into more
compensation for them. Plain greed.
In 2000, Fannie announced a goal of buying $2 trillion in loans from low-income, minority and risky buyers over the
next decade. My question is, why didn’t the government just plow
that amount into housing directly?
They could have bought people homes for what we’ve wasted on the bailout and other housing programs. Or better yet, rather than backing loans the government could be subsidizing them to reduce interest rates
and monthly payments for the riskiest borrowers. We could be deeding newly-renovated
public housing units over to low-income subsidized renters. Then they would have
a reasonable shot at getting their foot in the door of the American Dream. I
believe that this is clearly what Jesus would want us to try to do.
One reason this didn’t happen is because when Fannie and Freddie buy or guarantee loans they create a market
for other firms to make more money. There’s more private money available
to loan; generating additional fees and interest payments. When you are talking subprime
loans you're talking about exorbidant interest rates.
Some of the motivation was sincere, but thousands of people were raking in huge fees off of this money making machine. Low income buyers don’t make $2000 campaign contributions and bundle them through
lobbyists.
That's why our elected officials aren’t clean in the matter either. They
wanted Fannie and Freddie to siphon toxic mortgages out of the economy. Why? Was this the only means to stimulate the broader economy? Did it have to do with the man on Main Street? More likely, they were concerned because a recession often means being thrown out
of office. Plus they wanted to help out their pals who keep the contributions
flowing; the ones also who will probably employ them at high six-figure salaries after their distinguished careers as cash
poor public servants are over. These are also the people who invite them to nice restaurants and to fly on private jets
that are normally beyond their means.
To complete the picture, the Times recently ran “How Merrill Lynch Faltered and Fell” (November 8, 2008). This article provided the backstory on collateralized
debt obligations and credit default swaps. Merrill Lynch was late to the game
so they played catch up by going all in and removing the risk management oversight at their firm.
The market in these unregulated “synthetic” securities grew at a massive rate. Between 2005 and 2006 the investment in these illusory pieces of paper grew from $178 billion to $316 billion. A small team at JP Morgan pioneered these financial instruments about a decade ago. What’s most telling is that they would immediately sell-off the most risky loans. They would only keep the “super senior slice” in house, an amount that
virtually guaranteed a large profit.
Once again, the whole thing turned on greed. With stock prices stuck
and interest rates making bonds unprofitable, one of the inventors of these synthetics described what investors on Wall Street
were looking for: “Two things happened. They took more and more leverage, and they reached for riskier asset classes.
Give me yield, give me leverage, give me return.” The wealthy weren’t
satisfied with just having money they had to have more (see Revelations 3:17).
One wonders how some of the people behind this mess look themselves in the mirror.
True, they work long hours; reading, talking on the phone and peering into monitors to keep an eye on the markets. But, can you really call it an honest day’s work. Do they create anything tangible? Is what they produce necessary? Or, are they more like advertisers who seek to separate you from your money by any
means.
This was a house of cards, an illusory con designed to make money out of nothing.
Something akin to a pyramid or ponzi scheme. The bible says that the “love
of money is a root of all evil” (1 Timothy 6:10). And, you can’t take it with you (id. at verse 7).
So what does this have to do with some immoral crooks in China? Isn’t it clear? What they were
doing on Wall Street, although not illegal, was immoral. Self-centered greed
was placed ahead of looking out for the other guy—you know, “love your neighbor.”. There is little difference between the two situations except as far as we know no one has died yet because
of this financial crisis. What’s most frightening is that China has adopted our capitalist system without the rudimentary
check of at least some faith in God.
All of this reminds me of something that the Apostle Peter said:
And if you call on the Father, who without partiality
judges according to each one’s work, conduct yourselves throughout the time of your stay here in fear; knowing
that you were not redeemed with corruptible things, like silver or gold, from your aimless conduct received
by tradition from your fathers, but with the precious blood of Christ, as of a lamb without blemish and without spot (1 Peter 1:17-19).
We can all do better. Money can't save us. We need to stop our
aimless conduct and do the work of God. The system our parents left us has many
flaws and we are not a moral country. I pray that we leave the next generation
something better or we may start looking more like China.
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