There are a lot of folks, even many who write articles at Business Insider, who are stuck in saying that there is shared blame for the housing and credit crisis.They say that it was the banks, the borrowers, the real estate agents, the mortgage brokers. Henry Blodget, owner of this great site, likes to spread blame around as well. Warren Buffet says that everyone was having a good old time.
But I can prove that blame is not shared equally and the justice that should be applied cannot be applied equally.
Why don’t we look at each group and what they could or could not do based upon what the other folks were doing.
1. The easy mony loan originators (shadow bankers) were only able to do so because the warehouse big banks used hedge fund leverage, not their own reserves, to fund the loans. So those originators were beholden to the investment banks and commercial banks. They lied about income for their clients and put them into risky loans to get greater commissions.
2. The real estate agents had a product to sell that was already mapped out for them. The easy money loans moved the real estate, and without the product of easy money made available to the real estate agents, they would not have been able to move any real estate. They were dealt the hand given to them.
3. The borrowers were told, based upon history and the churn of easy money lending, that even after the dot com crash, real estate always went up. They believed the experts like you would believe a doctor diagnosing you or an auto mechanic fixing your car. Why wouldn’t they? Some knew that numbers were fudged, but they didn’t understand the process and were told everything was ok by the shadow bankers who were the professionals.
The problem with Henry Blodget’s equal blame thesis is that if you add up the blame of the borrowers + the real estate agents +the shadow bankers, you don’t equal the blame that securitization had on allowing all the other activity to happen. That securitization can be traced to Basel 2 in 1998.
It can be traced to investment/commercial banks carrying out the will of the central banks. If you add on the fact that bogus maths was used to lower the risk of the CDO’s that were securitized, that process was more responsible for the housing bubble than all the other participants combined!
We have to take the case of Bernie Madoff, who was a small time ponzi operator compared to Alan Greenspan. Madoff’s victims should have known that the returns were unreal compared to the returns normal investment brings. But is that an excuse for Bernie Madoff? Of course not. Bernie was at least 90 per cent responsible for the investment damage, and without his scam the investment would not have existed. The law prosecuted the source of the scam, not the victims who played along. So, the central banks and investment/commercial banks that produced the CDO’s through bogus securitization are the ones that are criminally at fault. It is a crime to commit fraud and no one is saying that the bogus CDO’s were not fraudulent. They were.
So without the securitization, the ones who caused the crisis should pay. But who actually pays? The borrowers paid with a loss of their residences. The shadow bankers went out of business. The real estate agents became bartenders and carnival barkers. So the bankers won didn’t they?
The concept of spreading the blame around equally is just not right. It is wrong. It would not be fair to put Mozilo and other shadow bankers in jail (if they are found guilty) without first putting the central bankers and investment/commercial bankers, the cartel, in jail first. It would not be right to put the real estate agents in jail without putting the cartel in jail first. It would not be right to put most borrowers in jail because even if they knew that the numbers were fudged they were told it was ok because they could refinance as the real estate continued to go up. And most didn’t know that the numbers were fudged. And certainly they would have received no toxic mortgage had the securitization process not continued.
The sentences, if based upon fairness would be life in prison for the bankers and far less for everyone else, if they were even prosecuted, which would be unlikely under any proper assignment of blame. If Madoff got life, what should the regulators and the CDO peddlers get? More? More than life.
And Madoff’s victims, no matter how they saw the scam as being a scam, were not prosecuted. That is the way it should be. Otherwise no one would invest. Same for the borrowers. Prosecute the borrowers and no one will borrow.
Buyer beware is a law relating to the condition of a property, not to the condition of a loan. It was the responsibility of the professionals to make loans that were in good condition, made sound by responsible underwriting. The cause of this underwriting no longer being needed was the banks themselves at the highest levels. Alan Greenspan was peddling the toxic adjustable mortgages in February, 2004, long after the powers that be knew a ponzi was in place.
The truth of the matter is that the concept of shared blame for the credit crisis is a Wall Street attempt to save their own necks. It is just more meta programming.
Occupy Wall Street is a movement that needs to pay particular attention to this distinction regarding blame, because the Tea Party folks, for the most part, are unable to do so. Many know much about the crisis, but they know little about how to assign blame. Listen up #OWS.
The hedge funds had a special role to play in the origination process. If they are not regulated as utilities, the easy money scam will visit us again, though from now on it will likely be backed by guarantees upfront on all the mortgages. That is a moral hazard that the Occupy Wall Street movement should take seriously.
The last time the money market was destroyed by a run on it was of course in September, 2008. The collateral that was put up to guarantee the big deposits was no longer of good quality, having been saddled with a bogus AAA rating. Well, next time the shadow bankers will be super confident, as they want all this collateral guaranteed by the taxpayer.
If this money market run was the reason for the massive decline in an already declining housing market, or an excuse for banks not to lend we may never know. What we do know is that the money market wants certainty for the big deposits it receives in exchange for quality collateral. I don’t know that a guarantee by government will make this collateral of good quality with a magic wand. There will be enormous moral hazard as I noted above with regard to the ease of writing easy money loans. If you think the government is behind you then you can be tempted to write easy money loans en masse.
The Occupy Wall Street movement should make sure that government guaranteed loans, which are what the banks want, are soundly underwritten, because there is a lot of money to be made with bogus loans and crappy collateral when the government guarantees everything. Borrowers need to be warned of the dangers, and bank investors as well.
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