The failure of US Leadership

Why the bailout problem occured

Why the current bailout is a con

When someone looks back on 2008 I doubt that folks will be discussing the election, McCain, Obama, the first black national party candidate, or Palin, the first female GOP VP nominee.

No, books will be written about 2008 as the year when the United States’ financial decisions about social engineering finally caught up with reality. People will write articles and books each stating it is the fault of the other; conservatives or liberals, Democrats or Republicans. I wouldn’t be surprised to find a conspiracy movie at the box office in 2012 by Oliver Stone.

Back in 1995, during the go-go 90’s Bill and Hillary were in the White House.  A decision was made to revise an obscure law called the “CRA” (Community Reinvestment Act). The CRA was established to require that banks invest (loan) money to blacks and other minorities. Previously, banks had been accused of ‘red-lining’ or refusing to lend in what were viewed as Black or other minority areas. The CRA was established to force lending in those areas as a requirement for getting a bank charter from the Federal Government. It was a stick used to force investment in neglected areas assuming that banks could handle a few losses and would help fix the racism of red-lining spurring investment in communities that had been ignored.

The 1995 version of the CRA was pushed equally by ‘business’ Republicans and Democrats who had their own reasons. The Democrats saw it as a way to push what they called ‘social justice’ and access to capital that would allow Blacks and other minorities to buy houses, start businesses and have the American dream. ‘Business’ Republicans saw it as a way to make money. A merger of greed and social theory that politicians of both parties thought would ‘help’ the disenfranchised to achieve the American dream.

So, with the adoption of the CRA amendments in the mid 1990’s banks and mortgage companies started ‘relaxing’ lending standards that allowed folks to borrow more than their house was worth, to ignore past bad credit decisions and to offer mortgage payments at a rate that was below the stated rate of the mortgage and didn’t even pay back the interest accruing on the loan. Folks sat while their mortgage balance increased. The largest of these offenders was Countrywide.

The theory was that the poor that would be helped into homeownership would get themselves established, have a burst of energy and pride, increase their earning potential and make more money so that they could handle the increased mortgage payments that were to come once the loan reset. Housing prices would increase exponentially to cover the initial lack of equity and minorities would finally join the middle class having homeownership in large numbers. All would be right with the world.

The banks and mortgage companies took these sub-prime mortgages and spread them around with the help of Fannie Mae (Federal National Mortgage Company) and Freddie Mac (Federal Home Loan Mortgage Company). Fannie and Freddie ‘packaged’ these loans into securities and sold them on the open market. As long as the loans kept paying the securities remained valued and the emperor’s lack of clothing was ignored. With the cash they got from the sale of loans to ‘investors’, more bad loans were made.
 

Between the mid 90’s and the mid 00’s these poor quality loans were restructured time and time again and every time someone went out and got a new mortgage to replace the one coming due more fees and expenses were heaped upon the unsuspecting family with little education who knew nothing of mortgage rules. They knew they couldn’t afford the adjusted mortgage payment so they readily agreed to refinance to a new mortgage knowing that their payment would not go up. The mortgage companies got a ‘new’ mortgage, a ‘new’ mortgage security and evidence of payment of the ‘old’ mortgage. On paper things looked fine.  In reality, churning mortgages or real estate is evidence of an economic crash to come.

Builders built at a feverish pace constructing ‘plastic’ houses with vinyl siding and questionable real value eagerly complicit in the entire process. These questionable sub-prime loans with their ‘buy now pay later’ financing scheme is very much akin to a used car salesman’s pitch. Plastic houses were snapped up by folks of all races, genders because they allowed individuals to buy homes without actually making a real mortgage payment. Folks were paying ‘negative’ interest (less interest than what the loan was accruing) or an artificial low ‘teaser’ rate. Developers eager to build, build, build - did so and sold these plastic houses to the unsuspecting using mortgage products designed to give folks a taste of the American dream without any real likelihood of success.

This cycle of deception continued for about 8 years until 2003 when Presidents Bush’s folks mentioned to Congress that perhaps we should change the CRA to stop this free access to sub-prime loans – a not so polite name for those loans given mostly to poor minorities that would never have qualified for home ownership. Democrats and Republicans in Congress refused stating that the American dream of ‘homeownership’ was for EVERYONE (even those that could not afford it).

The net result of this refusal to act in 2003 was that when the bubble burst starting in 2006 and housing prices were no longer increasing there was no way to justify the refinancing of sub-prime mortgages that had churned the market and kept it going. Folks in these houses and with those loans were now expected to pay the real cost but after churning their mortgages for years layering on fees as much as the original loan, they were hopelessly underwater, their homes worth less than they paid for them leaving the only solution to walk away from the first homeownership experience of their lives. Vast plastic subdivisions and fake McMansions were left vacant rotting in the sun and rain. Some became havens for criminals; suburban ghetto’s transplanted from inner-city locales.

The mortgage securities which represent thousands of these sub-prime mortgages were bought by IRA’s, 401K’s and foreign investors. They were ‘backed’ by Fannie and Freddie (a private company allowed to provide a US ‘guarantee’). Fannie and Freddie’s guarantee was worthless because the folks running Fannie and Freddie had no real ‘capital’ (stock value) to back up the guarantee. They had no ‘skin’ in the game to borrow a phrase my grandfather, a banker, used to say. The management of these institutions like all good con men headed for the hills. To paraphrase the crook in the movie Die Hard “by the time they sort this out we will be on the beach earning 20%”.

Now, President Bush wants a bail out. The Democrats want a bailout. None of them are even talking about changing the laws that caused of it all. President Bush just wants it fixed so we can avoid a ‘panic’. The Democrats in Congress, for the first time in 8 years are on the same side as Bush (that ought to tell folks a lot). Both know that if they complete the bailout without changing the law they can go on issuing sub-prime loans and wait for the next bailout in another 10 years. In the meantime, the liberals in Congress appear intent on offering a bailout or direct subsidy for those sub-prime homeowners. That would turn a $700 billion problem into a $1.4 trillion one. Those that get checks equal to 30% of the value of their mortgage would be the ‘winners’ and the rest of America’s homeowners the losers. If you pay your bills and do the right thing you are not rewarded. If you buy a house you can’t afford with a mortgage you didn’t understand you get bailed out. Poor homeowners with sub-prime mortgages receiving the net wealth of middle class Americans transferred by the US Government.

Greed and Social Engineering are killing the United States of America. RIP. We are now a debtor nation in league with 1970’s Argentina. To keep up appearances we ‘need’ to bail out the rich so they can keep making bad loans to the poor who can’t afford to pay them? Does that make sense to you? Without changes to this ‘bailout’ we will receive hyper-inflation and the US Dollar will become worthless.

To my knowledge, not one member of the media has asked either Senator McCain or Senator Obama if they support repeal of these bad laws.

Commissioner Bill James has represented District 6 on the Mecklenburg County Commission for 12 years. He is a CPA by trade having spent 15 years or so working for various ‘big 6’ accounting firms dealing with banks and financial institutions around the globe.