The Hon. Everett McKinley Dirksen was a gravely voiced, avuncular US Senator from Illinois (he served 1951-1969) who helped to pass the Open Housing Act of 1968, a powerful piece of the Civil Rights legislation. We long remember his most famous quote, about federal spending: “A billion here, a billion there, pretty soon, you’re talking real money…”
Real money. Yep, senator, that’s about where we are today as the folks up on Capitol Hill, down Pennsylvania Ave at the White House, right next door at Treasury, around the corner at FDIC, and a few blocks away at the Federal Reserve headquarters continue to fill wheelbarrows with cash to hurry on to the “capitalist sector” to steady our financial system. (The flow continues to banks, credit card companies, student loan guarantors, Fannie Mae and Freddie Mac, maybe to the car companies, most certainty to the insurers, and who know where else!)
Is there actually a Plan at work? Doesn’t seem so. More of a mindset. When you have a hammer, it’s said, everything looks like a nail. So when you and your crisis team come from Wall Street, and have sat at the catbird seat position of the Street at that (Goldman Sachs), what is the mindset? It seems, after all these weeks and much sturm and drang, it started out as let’s save our guys on the Street. Mindset. It’s what we are most familiar with, and comfortable with, if we come from the mountaintop of Wall Street in New York to tell the naïve folks in Washington what they need to do.
The first request then to the US Congress was for $700 billion or so (hear that, Senator Dirksen?) with little details about how the money would be used. Improvising on the fly, we then got “TARP” (the Troubled Assets Relief Program), sort of like a cash-filled “CARE” package sent on to the biggest banks and investment bankers/brokerages of the United States of America. Those “free market” “capitalistic” organizations that were, well, choking on “troubled assets.” Assets. Meaning…having value? Maybe not in this case.
“Asset” is bank-speak for loans. We’ve explained here before, in the reverse-mirror ofbanking accounting, an asset on the balance sheet is a functioning loan (not in default) that a borrower owes the bank. (You and I might count our assets as a paid off car, or that equity which really do in own in our home, or the cash in the now-reduced 401-k.) A liability for the bank: the cash on hand in the vault that the depositor owns…and could ask for (back) at any moment. So the “assets” that were boasted of in recent years as banks grew the asset base – and on which growth bonuses were awarded…became troubled. Got it?
How do assets get in trouble? Well, for home mortgages, any number of reasons.
Borrowers over reached and bought more house than they could afford. Happens. Maybe the local Realtor urged the purchase because it will be worth a heck of a lot more next year, won’t it?
Maybe it was a re-finance –maybe not the first at that. With houses escalating in price, many homes became ATM machines. Why not …because it will be worth much more money next year, won’t it?
Remember the bank and mortgage company ads just a short while ago? They urged us to: Pay off your student loans, car loans, those piled up credit card balances by re-financing your house? Well, a lot of us did!
And then there were the predatory loan practices. No one is much talking about this – easier to blame the borrowers, I guess. (We hear those conservative congressmen now – we shouldn’t be bailing out greedy borrowers!)
Question: When you closed on your mortgage, did you read every line of every document in the stack they placed before you? (You know, Big Government’s RESPA closing documents for the “protection of the consumer?”) Most of us didn’t. But therein were some traps to ensnare the borrowers and later send their mortgages to the dreaded TARP heap.
Loans had hefty pre-penalty agreements – pay off the mortgage and hand over a big check to the lender. If your house is below water (mortgage less than value), you can’t sell, can you? There were all kinds of fees built in – and these got rolled into the mortgages, inflating them. And then there were appraisals – what was the house really worth? Wanna make the loan? Inflate the Loan-to-Value (LTV) – how many appraisers really did that? According to accounts at big mortgage lender Countrywide, MANY did (inflate value). (Read Gretchen Morgenson’s fascinating post-mortem accounts every week in the New York Times).
For the past three years or so, a slew of exotic mortgages went sailing forth to borrowers, Adjustable Rate Mortgages (the famous “ARMs” you are hearing more about.) Zero interest and then kickers up, up and up, sometimes doubling the monthly mortgage payment for a family struggling today). In the first years of the 21st Century, half the states passed “predatory lending” statutes in an attempt to protect their citizens.
But – the federal banking regulators, members of congress, and other “protectors” looked away. This was a great game, wasn’t it? Even Chairman Greenspan buried the famous “irrational exuberance warning” deep inside a speech to an inside group of financial wizards – you don’t take the punch bowl away too early in the party, do you?
And so the very efficient mortgage machines rolled on. Local mortgage brokers sat at kitchen tables and promised… what? Who can remember now? The brokers then sold the mortgages on which they made a great fee to wholesalers, who then peddled them to banks and mortgage companies like Countrywide who then packaged them and sold them to investment banks who then peddled the packages to institutions and individual investors (like your mutual fund, or your pension fund, or even far offshore to central bankers in Europe). Thick stacks of documents accompanied all this commotion – did everyone read these? No more than you read the RESPA stack.
And now – we’re talking about trillions, good senator (of course, there’s also inflation since your day). Trillions and trillions of dollars needed for saving the financial system.
About those assets. Who owns them? That would take another column this size. Consider that 90 percent plus of mortgage borrowers are making their payments. Good news! The predatory or over inflated or whatever-they-are mortgages sitting in the “packages of assets” that at first were going to be addressed by the rescue money (before the Secretary of Treasury changed his mind) are still there. A mess, yes? Which way is the exit door? There is no door – yet!
This will be over when it’s over. How it will be over may well be up to President-elect Obama in 2009. Where it all ends up is anybody’s guess. Including Treasury’s, the Fed bankers, congresspeople, and everyone else in Washington at the levers of power. We’re all in this together – we need to work our way out of the mess and work to make sure this never happens again!