Posts Tagged ‘housing bubble’

If Banks Can’t Do Subprime, They Won’t Lend At All

A full third of Americans cannot qualify for a mortgage these days, recent data from Zillow.com and MyFico reveals. Would-be homeowners with credit scores at 620 or below are not being approved for traditional 30 year mortgage, even when they come with a healthy down payment of 25% or more.

In the days of glory before the housing bubble burst, these folks would have been steered into dangerous subprime loans that we know today were doomed to fail. Despite the fact that in most cases, this same group of people would have done fine with a conventional loan,  the banks wanted to increase their profits to extreme proportions.

Today, with foreclosures at record numbers and some banks being left holding the bag, most banks do not want to risk lending to people with low credit scores, all other things being equal. This is particularly troubling since many Americans have seen their credit scores take a hit from the bad economy. The housing market is weak enough, and banks not lending is a major factor in the continuing sluggish growth of the economy.

The “New Normal” According To One Fed Official

Sandra Pianalto, the President and CEO of the Federal Reserve Bank of Cleveland has predicted that our recovery from the Great Recession will be slow and that the end result will be a “new normal” where Americans’ expectations for a better life are diminished.  Read the entire article on the Huffington Post here.  A full transcript of Pianalto’s remarks are included in that article.

I don’t know why this is news, exactly.  Anyone out in the real world knows that this “recovery” is slow and most Americans aren’t planning anything farther into the future than how they’re going to pay the power bill when it comes due. 

Many people are now just aiming for ‘financial security’ as their American dream.

This downward shift in expectations isn’t something that has happened overnight. True, during the bubble years, when everyone was able to use cash out of their rapidly burgeoning home equity to buttress them against the effects of low wages and a high cost of living, Americans were able to have a semblance of a stable middle class life.

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“They Have Become Literal Sociopaths” –William Black On Bank CEOs

William Black,  author of “The Best Way To Rob a Bank Is To Own One” was interviewed by Bill Moyers on April 23 regarding the massive fraud that exists in our financial system and the role it played in the current financial crisis.  Read the transcript here or watch the video here.

Mr Black said that two things created the environment in which the financial crisis occurred:

1: No regulation

According to Mr. Black, this wasn’t a case so much of there being no regulatory authority to deal with the banks, although indeed, more regulations are needed, it was a case of the government being unwilling to act using existing laws, even after it was made aware of the impending crisis in subprime mortgages and the housing bubble.

He mentions former Fed Chairman Alan Greenspan’s refusal to use a 1994 law granting the Fed the ability to regulate all mortgage lenders after being advised that a housing bubble was developing and there was a major problem with sub-prime loans.

2: Compensation

Mr Black on CEOS:

We now have the entitlement generation as CEOs. They just plain feel entitled to being wealthy as Croesus with no responsibility, no accountability. They have become literal sociopaths

Further than that,  Mr. Black said that there are incentives at every level to cheat, to make deals regardless of the ramifications to others and to the economy as a whole.

So, with all of this fraud being uncovered, why aren’t people going to jail, or at the very least, why haven’t there been any criminal indictments handed down? Mr. Black also explained why:

There’s a huge part that is economic ideology. And neoclassical economists don’t believe that fraud can exist. I mean, they just flat out — the leading textbook in corporate law from law and economics perspective by Easterbrook and Fischel, says — I’ll get pretty close to exact quotation. "A rule against fraud is neither necessary nor particularly important." Right?

Notice how extreme that statement is. We don’t need laws. We don’t need an FBI. We don’t need a justice department. We don’t even need rules like the SEC. The markets cleanse themselves automatically and prevent all frauds. This is a spectacularly naïve thing. There is enormous ideological content. And it fits with class. And it fits with political contributions.

Do you want to look at these seemingly respectable huge financial institutions, which are your leading political contributors as crooks?

Watch the video, but not on a full stomach. Again, the link to it is here.

The S.E.C Sues Goldman Sachs For Fraud

The New York Times reports that the Securities and Exchange Commission has filed a lawsuit against Goldman Sachs for securities fraud over actions taken by the bank during the mortgage meltdown.

The lawsuit alleges that in February of 2007, Goldman Sachs created a financial instrument known as Abacus 2007-AC1, along with 25 other similar instruments,  that allowed  the bank and a few investors to wager against the housing market.

Specifically, this instrument was created at the behest of hedge fund manager, John A. Paulson, who had earned billions of dollars in 2007 by correctly guessing that the housing market would crash. While Goldman was telling the investors to whom it sold shares in Abacus that their investments were sound and that they were picked by  an “independent manager,” it had allowed Paulson to choose which bonds would go into Abacus. Paulson, of course, chose the weakest bonds that would certainly fail. Goldman and the other investors who bet against the housing market made billions while the investors that bought into Abacus lost billions, $10.9 billion, to be exact.

Although the mechanics of the matter are complex and hard to understand, the fraud here is very basic. Goldman represented that the shares in Abacus were sound when it knew in fact they weren’t and made money because of this fact.

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