In my workplace, staffed by adorable lily-white conservative people who have absolutely no clue whatsoever about what it’s like to be poor, much less a discriminated-against minority, one of the most-loved sports is what I call Poor People Bashing.
According to the Wonder Bread Crew, the melt-down of the financial markets is due almost entirely to two things:
1. Poor people taking out loans on houses they could not afford.
2. ACORN, who pushed governments and banks against their will and better judgement, to give loans to poor people to buy houses the could not afford.
It’s kind of quaint, really, their ability to distill the world down to such tiny, sanitized, bite-sized pieces – yo turn reality into a comic book with bright primary colors. Theirs is a world of little nuance or subtlety.
The problem is that the financial meltdown is far, far more complex than this. And the fact is, it has been primarily caused by very greedy, very RICH people who work for investment groups. These are the people who created a bizarre financial house of cards that even their CEOs didn’t understand.
Read this article if you really want a glimpse behind the curtain. It is a pretty lengthy but captivating essay written by Michael Lewis, author of Liar’s Poker, his book about the beginning of the subprime mortgage industry collapse.
Here’s a couple of snippets to whet your whistle:
The funny thing, looking back on it, is how long it took for even someone who predicted the disaster to grasp its root causes. They were learning about this on the fly, shorting the bonds and then trying to figure out what they had done. Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA.
But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.
That’s something that I hadn’t heard about before: the complicity in the bond rating companies in this whole thing. The fact is, without their help, none of this could have happened.
That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”
That last bit, the underlined section? THAT’S why these companies are failing. They are literally losing more money than they have on the books, than they are actually worth, because they created things to invest in THAT DON’T ACTUALLY EXIST!!!
But don’t tell that to my coworkers. They’re happy and content to blame it on all those lazy, shiftless poor blacks that got ACORN to get them a loan to buy a house they couldn’t afford and most certainly didn’t deserve. It’s so much easier than thinking.
By the way, if you want to know more about this, I highly commend your attention to the This American Life episode called “The Giant Pool of Money” that talks about how the Fed dropping the Prime Rate to 1% was the root of all this. Companies with extra money to park in investments had to begin looking for higher-return instruments and the whole sorry thing began. There’s also a follow-up show called “Another Frightening Show About the Economy“
I’m just sayin’…