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On Sun, 03 Aug 2008 14:02:32 -0400
Ben <profitok@xxxxxxxxxxxxx> wrote:
>
> Sent: Sunday, August 03, 2008 9:32 AM
> Subject: Please read the entire article
>
>
>
>
> How Did We Get Into This Financial Mess?
>
> by Jason Leavitt
>
> LeavittBrothers.com
>
> The financial "crisis" that exists in the US and world
>is one that hasn't been experienced
>
> since the 1929 stock market crash and subsequent Great
>Depression. Pointing fingers
>
> after the fact is somewhat cowardly, but unless we know
>why and how we got into this
>
> situation, how can we expect to get out of it and avoid
>another one in the future? Here's
>
> my take on who played a role in the financial situation
>we're in and who deserves most
>
> of the blame
>
>Federal Government. Banks lend money to home buyers. If
>the banks planned on
>
> keeping those mortgages, they'd be very careful who to
>lend to and how much to lend.
>
> They'd really do their due diligence to make sure there
>were very high odds the
>
> borrower would pay the loan back. But if the bank wasn't
>planning on keeping the loan,
>
> no doubt their standards would drop.
>
> Enter the Federal Government sponsored/supported Fannie
>Mae and Freddie Mac
>
> (both created by the government) which buy mortgages
>from banks, so the banks can
>
> turn around and make more loans. This implied safety net
>created by the government
>
> with these two GSE's (government sponsored enterprise)
>has had a very negative ripple
>
> effect. Namely, banks are motivated to take more risks
>and have significantly lowered
>
> their standards knowing they could always dump the
>loans.
>
> The government also encouraged policies that exacerbated
>the situation. In short, their
>
> extreme desire to increase home ownership - especially
>to lower income folks who
>
> couldn't afford a home - completely backfired. But are
>you surprised? Does any
>
> government program work? There are 300-400 government
>programs designed to
>
> make housing more affordable. If a couple can't afford
>to buy a house, why help them
>
> buy a house?
>
> And I could go on and on about how the government has
>branded home ownership as
>
> the American Dream, but nothing could be further from
>the truth. Owning a home is not
>
> an investment, it's a cost, and that cost is high. If
>you rented for 30 years and put the
>
> money you saved (lower monthly payments, no property
>taxes etc) into the stock
>
> market, you'd make a heck of a lot more money than if
>you put your savings into a
>
> house and held if for 30 years. But for years, people
>have been brainwashed into
>
> thinking they must own a home because renting is
>classless - or something new college
>
> grads do.
>
> President Bush and HUD Secretary Alphonso Jackson First
>a quick comment --- in
>
> the government and military there is a chain of command.
>You do what you're told by
>
> those you report to. If George Bush says: "I want 5
>million new homeowners," Jackson
>
> either works towards the goal or he resigns his
>position. There is no middle ground. So
>
> while I could leave the former HUD secretary out of this
>because ultimately Bush should
>
> take the blame, Jackson did have the choice to say: "No
>way, that's not possible without
>
> creating a mess. I'm outta here."
>
> Bush was way too eager. He was so excited for everyone
>to live the American Dream of
>
> owning a home. It was Jackson's job to work towards this
>goal, and Jackson was one of
>
> the people who encouraged little- or no-money down loans
>and interest-only loans. The
>
> ripple effect this had is unknown, but when the
>Secretary of Housing and Urban
>
> Development encourages totally irresponsible financial
>agreements, someone needs to
>
> at least step up and say: "that was a mistake."
>
> Stupid, Gullible Americans. Regardless of what happens
>in Washington, Americans
>
> still have the choice to buy or not buy, so ultimately I
>could blame them. They are, after
>
> all, making the final decision, and they could have
>easily walked away from the table.
>
> But they didn't. They bought houses they couldn't afford
>with money they didn't have by
>
> not putting money down, using interest only loans,
>and/or using variable rate loans they
>
> knew would reset higher than they could afford. If you
>wanna throw a couple grand into
>
> a stock because you think it's going to move up, fine;
>the damage will be minimal if
>
> you're wrong. But why in the world would you potentially
>cripple the rest of your financial
>
> life by buying a house you had no business buying?
>
> Banks. The ultimate blame could also be place here too.
>They are, after all, the ones
>
> lending the money. They do have the ability to say: "No,
>you can't afford that house. We
>
> are not lending you the money."
>
> Call them greedy. They only make money when they make
>loans and since money was
>
> artificially made cheap, they couldn't control
>themselves. They drastically lowered their
>
> standards and loaned money to parties they should have
>know could not pay the loan
>
> back. Shame on them.
>
> Standard & Poor's and Moody's etc. So banks loan money
>and take those
>
> mortgages/loan docs etc. and package them together to be
>sold as CDO's
>
> (collateralized debt obligations). Fannie Mae, Freddie
>Mac, Bear Sterns, foreign banks
>
> etc. buy CDO's without scrutinizing the individual
>contents because they trust the likes
>
> of Standard & Poor's to do their due diligence to
>accurately rate the credit worthiness of
>
> the package.
>
> If Bear Sterns buys billions of dollars of subprime
>mortgages from a bank, then only
>
> they should be blamed for buying the junk - the buck
>stops at their desk. But if this is
>
> the case, why does the entire planet pay such close
>attention to the ratings?
>
> If Standard & Poor's inaccurately rates the CDO's, and
>banks end up buying chickens
>
> they thought were eagles, who is to blame? Nobody will
>argue S&P had extremely high
>
> ratings on loans that were total junk. Should S&P take
>some of the blame? Have they
>
> admitted their calculations where wrong? Moody's
>recently said a computer glitch may
>
> have resulted in inaccurate ratings. Is this little
>admission enough? Were these rating
>
> agencies and the banks working together?
>
> In my eyes, the rating agencies need to either admit
>they screwed up, or forever, they
>
> have zero credibility whatsoever.
>
> Mortgage Lenders. These are the guys most home buyers
>work with. I know banks
>
> ultimately lend the money, but most buyers don't work
>directly with a bank; they work
>
> with a middleman which may be a big company like Lending
>Tree or Quicken Loans
>
> (you see their banner adds all over the internet) or a
>small ma and pop type shop. There
>
> are some very good lenders out there that won't let
>buyers get in over their heads (I've
>
> bought two properties in the last two years, and each
>time it was a simple 30-year fixed
>
> with no bells and whistles or special conditions), but
>there are many that will do anything
>
> to get your business because they only get paid when
>they hook up a buyer with a
>
> bank. They're the ones that told people they could
>afford 'that' house if they used an
>
> interest only loan; they're the ones that encouraged
>buyers that putting no money down
>
> wasn't such a bad idea; they're the ones that exposed
>people to such mortgages as
>
> Payment Option Adjustable Rate Mortgage which allows
>borrowers to pay a small
>
> portion of the interest due each month (but then the
>remaining principle and interest
>
> balance due is added to what they owe).
>
> If these middlemen collectively were more upfront and
>honest with buyers rather than
>
> selling them up a river just to get their business, the
>housing market may not have
>
> gotten out of control.
>
> Alan Greenspan is the man most would like to blame, and
>while I certainly agree he
>
> played a role, it's my belief he only added fuel to the
>fire after the fire was already lit.
>
> The economy's expansion and contraction hinge most on
>one thing, and that thing is
>
> liquidity. The more money there is, the more growth that
>happens. Unfortunately the
>
> opposite is also true. Give me a city full of brilliant
>entrepreneurs, and without money,
>
> they won't create much.
>
> Greenspan artificially lowered overnight rates to
>encourage banks to loan beyond their
>
> reserve requirements. Essentially, he flooded the market
>with money which you may
>
> think is good, but at some point, if there is too much
>money, that money is wasted or
>
> used inappropriately.
>
> It's pretty simple. When money is tight, it's naturally
>funneled towards safe investments
>
> just like tight money in your household results in
>spending only on the bare necessities.
>
> As more money becomes available, riskier bets can be
>made, and when there's "too
>
> much" money, bets that should never be made no matter
>what the circumstances, are
>
> places.
>
> This is what Greenspan did. He made too much money
>available, so businesses that
>
> should not have gotten loans, got loans, and people who
>had no business buying a
>
> house, bought a house, and people who should have bought
>$300K house bought
>
> $400K houses.
>
> Too much money results in totally irresponsible usage of
>that money.
>
> A tightening of rates - or if he at least held them
>steady - may have partially choked off
>
> the aggressive lending.
>
> But Greenspan is not #1 on my list because I do not
>believe people have to sip from the
>
> bunch bowl even though it's full. Anyone who's gotten
>into financial trouble could have
>
> chosen to walk away from the table. Several years ago my
>girlfriend (now my wife) was
>
> in the market to buy a condo. She was approved for much
>more than she knew she
>
> could afford. Did she buy up to the limit her lender
>approved her for or did she buy what
>
> she knew she could afford? You can guess the answer; she
>wasn't about to get herself
>
> in trouble.
>
> To say that Greenspan is most responsible for this mess
>is to desire the Fed play a
>
> greater role in tinkering with the money supply. This is
>a discussion in and of itself and
>
> not one I wish to go into here. There are some
>well-known economists (John Maynard
>
> Keynes comes to mind) who absolutely believe the
>government should stimulate and
>
> suppress the economy to dampen the economic
>fluctuations. But let's not get into a
>
> political discussion.
>
> There are many people involved in buying a house. A
>buyer works with a mortgage
>
> lender to secure a loan from a bank which then packages
>that loan to sell to GSE's such
>
> as Freddie Mac or other banks such as Bear Sterns. The
>system was greased with
>
> artificially low rates, easy money, and extremely
>irresponsible activity from the rating
>
> agencies. If any of the parties involved would have put
>their foot down, and said: "No, I
>
> cannot in good conscious do this," I would not be
>writing this report.
>
> But the roots of the problem cannot be traced back to
>any of these parties.
>
> Bill Clinton. All these people and institutions played a
>role getting us to the current
>
> housing situation, but ultimately, I blame Bill Clinton.
>This probably comes as a shock to
>
> most of you because his name is hardly ever mentioned,
>but in my opinion, if you start
>
> with today and work backwards, seeds of the housing mess
>were started in 1999 when
>
> Bill Clinton replaced a 66-year old law that restricted
>the capabilities of financial
>
> institutions with one that vertically aligned the
>industry and set it on a path to
>
> destruction. Let's go back in time.
>
> It was believed improper and super aggressive banking
>activity played a big roll in the
>
> 1929 stock market crash and subsequent Great Depression.
>At that time, commercial
>
> banks took depositors' money and made risky investments
>in the stock market. Call it
>
> greed, but times were so great in the 1920's, the desire
>to be involved and the feeling
>
> the good times would never end, caused many banks to
>over-speculate with money that
>
> wasn't theirs. They were literally taking depositor's
>money and using it to finance risky
>
> investments. Even worse, unsound loans were made to
>companies in which the banks
>
> invested in, and they encouraged their clients to also
>invest. Can you say: Major conflict
>
> of interest?
>
> Remember back in 2002 when Citigroup came under fire for
>their over involvement with
>
> WorldCom. Citigroup was not only acting as an investment
>bank which made money
>
> when WorldCom "made deals," they were also upgrading the
>stock, so those deals were
>
> easier to execute. It was a Ponzi scheme that had no
>system of checks & balances, and
>
> it eventually imploded. This is exactly what was
>happening in the 1920's that partially
>
> led to the collapse of the stock market and many years
>of struggles. Along comes the
>
> Glass-Steagall Act in 1933 which separated commercial
>banking from investment
>
> banking - essentially a bank could not also be a
>brokerage firm and vice versa.
>
> Sectioning off the financial industry incidentally set
>up a system of checks and balances
>
> and eliminated many conflicts of interest. Also, banks
>were insulated somewhat from
>
> the stock market.
>
> Since then, there have been periods where housing prices
>appreciated faster than
>
> historical norms or flattened out for a couple years,
>but overall, it was smooth and
>
> steady sailing with no major, national interruptions.
>And although we've had several
>
> recessions (recessions are no big deal; they surface
>every handful or years and we
>
> always emerge from them stronger than when we entered)
>we didn't have anything
>
> even remotely close to the financial crisis that
>followed the 1929 stock market crash.
>
> Why? Because of the explicit system of checks & balances
>that existed due to
>
> companies not being permitted to have their hand in more
>than one part of the process.
>
> That's what the Banking Act did. It said: "You can't be
>everything in the process; you
>
> can't be vertical integrated."
>
> But this all changed on November 12, 1999. With the CEO
>of Citigroup looking over his
>
> shoulder, Bill Clinton signed into law the
>Gramm-Leach-Bliley Act which repealed the
>
> Glass-Steagall Act of 1933.
>
> The Gramm-Leach-Bliley Act permitted commercial and
>investment banks to
>
> consolidate, and almost overnight behemoth financial
>service companies that supplied
>
> everything to everybody were born. Smith-Barney, Salomon
>Brothers, PaineWebber
>
> and many other well-known and respected investment banks
>were gobbled up by
>
> Citibank, JP Morgan etc, and while the lay public didn't
>have a clue what was going on,
>
> conflict of interests were rampant. Suddenly the banking
>arm of one of these financial
>
> service companies was pressuring the investment arm to
>raise its ratings on stocks to
>
> help lubricate the deal-making process.
>
> (As a quick side note, Citigroup played a major role
>lobbying for an end to Glass-
>
> Steagall. Starting in 1998, the finance, insurance and
>real estate industries together
>
> spent more than $200 million to get Glass-Steagall
>repealed, and not so coincidentally,
>
> only a couple days after Clinton signed
>Gramm-Leach-Bliley into law, recently-departed
>
> Treasury Secretary Robert Rubin was hired by Citigroup
>as a member of its 3-person
>
> office of the chairman.)
>
> If you start with today and work backwards with
>intentions of figuring out when "all this
>
> mess started," you'll find many parties that played a
>role in adding fuel to a fire which
>
> was spinning out of control, but your journey won't end
>until November 12, 1999 when
>
> Bill Clinton tore down the walls within the financial
>community.
>
> I'm not going to go as far to say if Bill Clinton had
>not repealed Glass-Steagall, we
>
> wouldn't be in the financial situation we're in, but I
>can certainly say it would have been
>
> much more mild and probably isolated. When second and
>third parties are involved in a
>
> transaction, more due diligence is done, more scrutiny
>is applied, and less risk is taken.
>
> Bill Clinton started this financial mess.
>
> In Summary Bill Clinton laid the foundation. Alan
>Greenspan greased the wheels.
>
> Then, extremely unscrupulous mortgage lenders and banks
>took full advantage of
>
> gullible, unsophisticated borrowers.
>
> By replacing Glass-Steagall with Gramm-Leach-Bliley,
>banks and investment brokers
>
> were permitted to consolidate, and the natural system of
>checks & balances was
>
> destroyed. Not to mention the conflicts of interest that
>were born. Yes, Greenspan aided
>
> the situation by lowering rates and keeping them low,
>and S&P encouraged risky loans
>
> by giving them AAA ratings, and many idiot Americans who
>thought prices would keep
>
> appreciating need to check themselves into gamblers
>anonymous, but if I had to go
>
> back to the beginning, to where this mess started, it
>would be with Bill Clinton's
>
> signature on November 12, 1999.
>
> You opinion is welcome and appreciated.
------------------------------------
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