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Thursday, April 22, 2010

Wall Street Was Not Where The Economic Meltdown Began

Obama is speaking at Cooper Union, in the heart of the New York financial district, which AP describes as follows (emphasis mine):
Ramping up pressure for a financial overhaul, President Barack Obama is heading to the place where the economic meltdown began to argue for stronger government oversight of the industry and to urge Congress to finish a regulatory bill quickly. Otherwise, he says, we are doomed to repeat the past.
This is the narrative the administration wants, it all was Wall Street's fault.

The economic meltdown, however, did not start on Wall Street any more than high health care costs were the result of evil pharmaceutical companies which sold you the expensive red pill rather than the less expensive blue pill; or the greedy doctors who performed unnecessary surgeries to make more money.

All these false Obama administration narratives have a commonality; they demonize an identifiable enemy and they avoid blame being placed on government policies.

The reality is that the economic meltdown began with federal government policies which kept interest rates artificially low and forced banks to abandon traditional lending practices in the name of home ownership for all. These policies started under the Clinton administration, and continued under the Bush administration.

Democrats, including people like Barney Frank and Chris Dodd, fought hard to avoid Bush administration attempts to reign in Fannie Mae and Freddie Mac.

I have spent most of my professional life suing Wall Street firms, so I have no sympathy for the many bad practices which have ripped off investors. But just because Wall Street has engaged in some bad practices does not mean Wall Street is responsible for everything that goes wrong in the economy.

Wall Street was an accomplice in the housing bubble in the sense that the securitization of the mortgages provided a cash flow which allowed the bubble to grow. But honesty requires the acknowledgement that Wall Street did not create the housing bubble or cause it to burst.

No bad mortgage lending practices, no housing bubble. No bad mortgage lending practices, no economic meltdown. No bad mortgage lending practices, no bad bets on the housing markets. It was the bad mortgage lending practices, stupid.

The economic meltdown started with the people in government -- including many of the Democrats who now are pushing for "reform" -- who corrupted the credit practices of banks and other lenders in the name of progressive policies. The same policies which will cause our heath care system to collapse.

And that is a narrative this administration will do anything to avoid, hence the demonization of Goldman Sachs and others. Hence Obama taking the fight "to the place where the economic meltdown began."

Except that it didn't. The place where the economic meltdown began was in the offices of Fannie Mae and Freddie Mac, the Federal Reserve, the White House, and the halls of Congress.

If Obama wanted to visit the place where the economic meltdown began, he could have walked there in just a few minutes.

Update: The Wall Street Journal has a good article about the bad mortgages behind the Goldman Sachs deal, The Busted Homes Behind a Big Bet:

The government's civil-fraud allegation against Goldman Sachs Group Inc. centers on a deal the firm crafted so that hedge-fund king John Paulson could bet on a collapse in U.S. housing prices.

It was a dizzyingly complex transaction, involving 90 bonds and a 65-page deal sheet. But it all boiled down to whether people like Stella Onyeukwu, Gheorghe Bledea and Jack Booket could pay their mortgages.

They couldn't, and Mr. Paulson made $1 billion as a result.

And the reason there were bad mortgages? Bad lending practices fomented by Barney Frank, Chris Dodd, Jamie Gorelick... and yes, Barack Obama.

Here is the description of one of the soured mortgages from the WSJ article:

One mortgage in the Abacus pool was held by Ms. Onyeukwu, a 43-year-old nursing-home assistant in Pittsburg, Calif. Ms. Onyeukwu already was under financial strain in 2006, when she applied to Fremont Investment & Loan for a new mortgage on her two-story, six-bedroom house in a subdivision called Highlands Ranch. With pre-tax income of about $9,000 a month from a child-care business, she says she was having a hard time making the $5,000 monthly payments on her existing $688,000 mortgage, which carried an initial interest rate of 9.05%.

Nonetheless, she took out an even bigger loan from Fremont, which lent her $786,250 at an initial interest rate of 7.55%—but that would begin to float as high as 13.55% two years later. She says the monthly payment on the new loan came to a bit more than $5,000.

She defaulted in early 2008 and was evicted from the house in early 2009.

Next headline circa 2015? "Wall Street Caused The Collapse Of The Health Care System."

Related Posts:
Now It Begins - Dems Push For Criminal Charges Against Goldman Sachs
Senator Hedge Fund
Now They Are Coming For Goldman Sachs

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  1. "If Obama wanted to visit the place where the economic meltdown began, he could have walked there in just a few minutes." I believe that he could have looked in the mirror: Didn't he represent plaintiffs in a class action against Citibank to force the bank to make these bad loans?

  2. I maintain, and have not had anyone make a substantial objection to, the notion that even with all of that, it was $4 a gallon gasoline that tumbled the house of cards. It was the trigger that pushed the already stretched household budgets (due to the practices cited above) to the breaking point and since the mortgage bailouts have done literally nothing to increase the health of the average mortgage holder's situation despite costing the billions it has, $4 a gallon gasoline could do it all over again.

  3. "No bad mortgage lending practices, no housing bubble. No bad mortgage lending practices, no economic meltdown. No bad mortgage lending practices, no bad bets on the housing markets. It was the bad mortgage lending practices, stupid."

    Amen! This needs to be the mantra of ALL Republican and Conservative candidates, both this November and in 2012. Great post, once again, Professor Jacobson!!! Out of the park!

  4. Devastating video. Devastating post.

    The bad news is these same baffoons are now in charge of our health care. And they may soon be in charge of Wall Street, our energy resources, internet "freedom," and talk radio.

  5. I think to be honest you would have to walk back to the 1930s. And it isn't over yet.

    I watched the TARP watchdog Neil Barofsky on Cavuto yesterday, and basically the bailout for homeowners is a target for fraudsters. On a related note, he explained GM's repayment to the government was by using other government money, not from earnings. Or as Cavuto put it, using one credit card to make a payment on the other.

  6. Your analysis is dead on (IMHO) today. The problem is that our one-party system is about to cement the status quo of "too big to fail" with a guarantee of future taxpayer-funded bailouts for Goldman. We are not going to see smaller banks. We are not going to see a less risky financial system. We are going to move into a lethargic banking system purporting to be a "free" capital market where no sensible investor will put his/her money at risk without guarantees.

    That means capital formation will be very difficult. In order to raise capital in the future will resemble the Middle Ages where you had to kneel before a king or a prince for the privilege of participating in the economy where the "king's share" of the profits go to the king. You get a title.

    Ultimately, we are left with a government too big to succeed and it will fall on a global scale when the bubble can no longer sustain itself and the global elites start raiding the pantry. This is how global wars start.

  7. Just an aside, I can't stomach the irony of Obama making an obnoxiously gloating speech today at the Cooper Union Hall in NY which was where Lincoln's career took off. We've gone full circle in opposite directions.

  8. From the brilliant website www.doctorhousingbubble.com describing a property being marketed by Fannie Mae this week:

    "“- this is a Fannie Mae HomePath property. – purchase this property for as little as 3% down! – this property is approved for HomePath mortgage financing. – this property is approved for HomePath renovation mortgage financing.”

    I think this is a HomePath property. So after seeing more of these properties hit the market, I decided to go to Fannie Mae to see what it takes to qualify for one of these properties:

    “Low down payment and flexible mortgage terms (fixed-rate, adjustable-rate, or interest-only)”

    Wait, we’re pushing more adjustable-rate and interest-only loans? I’m glad we’ve learned our valuable lesson! Let us see what other “benefits” are included with HomePath properties:

    “You may qualify even if your credit is less than perfect”

    Well that is reassuring…

    “Down payment (at least 3 percent) can be funded by your own savings; a gift; a grant; or a loan from a nonprofit organization, state or local government, or employer”

    Say what? I like how we are provided a variety of “creative” options on how to line up that low down payment. This is sound very familiar (I think I might have seen the same pitch in some of those option ARM commercials).

    “No mortgage insurance”

    “No appraisal fees”

    Seems like the bar is set fairly low to qualify for one of these properties. But wait, there’s more! You also have access to additional funds for renovations:

    “Financing to fund both your purchase and light renovation”

    So to get the market moving again, we’ve reverted back to the days of EZ financing. Didn’t we get the memo that a low down payment hikes up risk to another dimension? Apparently looking at a W2 is now what qualifies as due diligence."
    I want the Democrats to tell me again that it was Bush's fault.

  9. Events like today and from our storied and troubled past get curiouser and curiouser. I always like to follow the money trials. It is unfortunate that the State Run Media is sound asleep and/or in a Zombie state.

    Jason Mattera, go interview Chris Dodd and other Federal Robbers which are now so aptly named cronie Capitalists.

    AZ Cojones

  10. Awesome article.

    The key to why the housing bubble blew out the economy was that:

    1. while the entry of illegitimate "homeowners" bid-up the home prices, the banks didn't care because they could loan 100k to a deadbeat, and still have a 120k home to repossess three years later, they could discount the property, and still come out whole.


    2. When the bubble burst, those same repos were causing the banks to eat huge losses, over and over again.

    The unintended consequence of "more homebuyers" was the rise in home values it fueled, which in turn hid the problem longer, and so put even more bad mortgages into the system.

  11. Great post, as always. I hope the GOP is reading. John McCain had a chance to raise these issues during his presidential campaign, and he punted and the GOP has been on autopilot ever since.

    My fear is that we are heading down the path to some sort of banking oligarchy of a few massive banks with complete control. Each Friday more regional and local banks (who try to make loans and are exposed to real risk) get shut down, with their accounts trickling upward. The oligarchy banks will be stuffed with Dem. cronies, Chicago-style. Loans will be scarcer and subject to more strings. And the Feds will simply seize small banks and companies with their newly granted powers, and act with impunity demolishing bankruptcy laws, just like they did with the automakers. The oligarchies will make money through easy credit, and the Fed will be pleased keeping rates "low" through the propped up scheme they've devised (even though there is no real demand for US treasuries). And the GOP will still be defending some long-dead version of Wall Street.

  12. William,

    this post is well done. You have covered all of the most relevant issues regarding how the melt-down happened in the first place. It was sickening to see those people making such obvious false claims that Fannie and Freddie were fine.

    I agree with the other poster about the actions of Dr. Utopia. I do not know about the class action suit, but he lobbied Washington to get changes to the Act so that these derivatives could be packaged and made. So yes, Dr. Utopia is indeed responsible for the mess.

    The question that I have is this: Dr. U's mother and grandmother were involved with the international "micro-financing" in countries such as Indonesia, Pakistan, India and elsewhere. Has anybody been looking to see if this market is stable, or whether it too, is about to collapse big time... leaving an already poor population without even their homes.

  13. How many closings I saw with the 1003 (mortgage application) having a name at the top and a signature at the bottom and nothing in between; no job, no assets, no bank account, no hope of ever paying back. And, these folks got back 6% toward their closing costs. Now, betting against those loans ever being repaid is a crime??!! They were a joke to begin with. The guys who bet against them should be running the treasury dept.; at least they had the brains to see crap foisted on the banks by the govt.

  14. First let me say that I started reading your blog a few months ago and appreciate your insight. I’ve learned a lot and now make a daily trip here.

    I have a few questions about this story. Why did lenders make these loans if they knew that they were high risk? Were they required by law? Also if they sold these loans to FM & FM how did they incur loses? Were their losses from loans they keep in-house and sold to each other? If so, were they required by law to use lower loan standards?

    Thank you again for your insight.

  15. @bikerrich, actually the real crimes were committed by those who even allowed these people to apply for loans in the first place. Someone needs to have a good look at Countrywide as well as the activities of Fannie and Freddie.

    However, the enabling bill is what has helped to cause the crisis and yes Congress, those in Congress who were responsible for passing that bill must go.......