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Comments on Michael Lewis' Interview
on CBS 60 Minutes...Part 1
By today, many people have seen the CBS 60 Minutes interview with Michael Lewis, one time Wall Street insider turned best selling author. The video has been published all over the web as we did.
The interview was informative and brought to the public's attention some of what caused our economic collapse. There are however, several comments Mr. Lewis made that I disagree onwith and several points that need to be expanded on. This is a large story so I will break it up into several posts over te coming days and weeks. It is actually the story that began my blogging career.
Mass delusion or corruption and fraud? Lewis said that he believes the problem on Wall Street was "mass delusion" and that the CEO's on Wall Stree, Henry Paulson - then U. S. Secretary of the Treasury and Fed Chairman, Ben Bernanke, did not know what was happening. He later stated that the "fiasco was stupidity not corruption.
While I recognize that Mr. Lewis spends a great deal of time researching his topics and do very much respect his writings, I do disagree with his belief of "delusion" and stupidity. I believe that it was there corrupt aware actions causing insane financial gains that made them dilusionary and that grandeur ultimately made them stupid. Often times a lot of money makes you believe that you are invincible. Once you believe you are invincible - which all the banks now do - you then become delusional and stupid. But you did know what you were doing in the beginning..
During those "bubble" years, I was a mortgage broker/banker and I saw what was happening. As the guidelines and requirements for mortgage qualification began to ease - to the point almost of "have a pulse, get a loan" - I kept saying that loaning money under these relaxed guidelines "were a disaster in the making". I know that many of these loans would default, "they were foreclosures waiting to happen".
Just a short note here. Many of you are thinking how can I say some of this while I was riding the "gravy train". To set the record straight, my company did not make loans to people who truly could not afford them. Most of our clients were lower income families mostly renters. We gave them the opportunity to qualify for a purchase whose payment would be almost the same as their rent and we verified a good rental payment history to boot. We qualified based on what they truly could afford, not on the larger amounts the new relaxed guidelines allowed. We used good sound moral, ethical and financial standards (which I must admit sent many of our prospects to other lenders).
My point here is that if I knew, then they all knew. How could they not have known. Not only did they have to know, the Wall Street banks - Goldman, Merrill, Lehman and Bear Stearns - all owned wholesale and retaail mortgage companies. They sold the mortgage programs they created to mortgage brokers and bankers (wholesale) as well as selling mortgages directly to the consumer (retail). In other words, they created the product, distributed the product and sold the product themselves on the street. Compare it to a drug lord who grows the pot, distributes the pot in mass quantities to others by the ton and tne also sells his pot himself on the street, one ounce at a time.
To get a better understanding of how the mortgage industry worked and to further prove my belief that "they knew" let me give a rather simplistic explanation of how the industry worked (and still works with Fannie and Freddie)
When a loan is made to you - by either a broker or a bank - that loan is sold to a securitizer (Fannie and Freddie are securitizers) who in turn package and sell these loans to investors worldwide. In the early days of sub prime - mid nineties -there was no investor outlet on Wall Street.What allowed the bubble was that Wall Street created an outlet for sub prime loans which prior did not exist. Sub prime lenders actually had to lend their own money and hold the loans in their portfolios. Only conventional loans had a securitization outlet which was Fannie/Freddie. In simple terms, money was loaned to the consumer, the lender sold the loan to Wall Street which at that point gave the lender that amount of money to lend again. the money kept going full circle.which is how so much money in mortgages could be loaned. To expand the circle they had to find more and more "investors" passing the total risk to them and providing a never ending well of money to loan. The whole key was to entice more and more investors worldwide. To do so is where I believe the scam begins.
To get more investors they needed "AAA" ratings, then to feed the feeding frenzy of investors who believed they were buying almost risk free bonds, they needed to get more loans. to get more loans they had to qualify more people. To get more people to qualify they had to lower the requirements - credit scores, down payment, income and more.
Thus began the sub prime bubble. None of this could have happened through delusion or stupidity. It was planned, calculated, intentional and driven by pure greed. Morality and ethics be damned.
My point is then, if Wall Street created the loan programs (more on loan programs in a future post), craated the guidelines, bought the loans, sold the loans (more on rating agencies in future posts) to issue fraudulent ratings - then how could they not have known. When billions of new dollars start coming into your company, would not the CEO know how it was happening? And if he truly did o't know, I would have to believe that he would ask someone what they were doing that was generating all of this "insane" profit.
I believe the sub prime industry started out legitimately but the large amounts of money generated and the potential to generate more then anyone had ever seen became the narcotic known as greed that spawned the corruption and. fraud I don't believes it was "diffusional" and "not fraudulent". Indeed it was not "stupidity" either. It actually borders on genius even though laced with fraud and deception. History may well record these events the greatest fraud the world has ever seen. They knew!
Next in Part 2...Goldman Sachs - The Facilitator
More reasons they knew