Sunday, August 30, 2009

Bombing the Black 'Burbs

Credit itself is valuable and not parasitic, but huge returns in banking service areas like mortgage lending ARE parasitic. Obviously fat profit margins raise the cost of any product to consumers, though this basic idea seems to be lost on the dumb bunnies that line the streets throwing confetti on the CEOs that pocket tens of millions a year in personal income to run the U.S economy into the ground. The human toll is huge (see this New Haven story as one small example, or today's LA Times on California state workers pushed out of their houses by furloughs), U.S. bank's subprime policies have done all the marxist work any critic could ever want, and Friday's Democracy Now had several particularly good segments on their greedy dumbass antics that have pushed big chunks of the black and brown middle classes back into poverty.

The short version is that folks got tired of waiting around for the raises they hadn't had since 1973, jumped into miracle loan products that were invented so they could be packaged and sold to pension funds and other huge buyers as mortgage-based securities, and were assured that their house value could only go up so that they could always refinance before their balloon payment or interest rate reset bankrupted them. And here we are with housing prices down over 50% in centers of black home buying like Las Vegas, and the bottom 1/3 of the market still falling at about a 25% annual rate.

DN has one segment on how the feds' Making Home Affordable program is giving $21 billion to 25 banks to get them to restructure troubled mortgages - 21 of which were major subprime lenders to begin with. See the report by John Dunbar of the Center for Public Integrity - the biggest chunk, over $5 B, going to B of A's infamous, recently-purchased unit Countrywide.

There's a segment with Wells Fargo subprime whistleblower Elizabeth Jacobson. Some highlights:
  • Wells Fargo had a separate subprime loan division. Commissions there were 3-4 times higher than in the prime loan division. Interest rates could go from 6% to 12% in two years, had extra origination points, etc. raising customer cost along with commission. Additional revenues were built in by structuring the product to induce a new loan every two years.
  • "As a company, Wells Fargo pushed the subprime loans, because it was their goal to have the subprime division pay for the fixed costs of the whole company. So there were [subprime] quotas to be met."
  • deception at the top: "I happened to see a news report with the CFO of Wells Fargo, and he was questioned about the subprime division and denied at that point that Wells Fargo even had a subprime division. So here he is, the chief financial officer, where the subprime loans were supposed to be paying for the fixed costs of the company, and he’s denying that Wells Fargo even did subprime loans."
  • targeting minority communities: bank management "would encourage the loan officers, the subprime loan officers, to go into Baltimore city and target the churches, the African American churches, to get a relationship going with the minister or the reverend at the church and try to get that person to schedule some sort of meeting. They would call it a “wealth-building seminar” to get the parishioners of the church to attend. And any loan that was funded by Wells Fargo, whether a purchase or a refinance, $350 would then be donated to the church. And so, that was the incentive for the church to want to have these seminars there."
One small silver lining is that Elizabeth Jacobson is now defending victims of foreclosures in Maryland state proceedings. But meanwhile, watching the big dogs that are still in charge, the little dogs keep feeding - on themselves.

1 comment:

Gerry Barnett said...

It seems each good thing becomes a potential vector for bad things to ride in. And the more a good thing tries to protect itself (itself a good thing) the more it creates new opportunities for bad things to ride in. Perhaps this is why Dante puts the intelligent frauds in the lowest pit of hell, because the community has no defense for it. Just because the activity is buried in a maze of technicalities in the business does not make it any less a fraud against community.

Credit is a kind of grace. Betting on the risk element of credit becomes parasitic. Packaging credit to make betting easier is a questionable service. Offering insurance for risk taken by betters is a questionable service.

Betting against the credit being repaid--betting against not only the decision to give credit, but also the optimism by which credit is sought, is a bet against the community. One may hold such an opinion, but I don't see how trying to make money from it serves any use in the community. Merely because that adverse bet is made to look like a "security" doesn't save the nature of the bet. Ultimately, the difference is, the bet against optimism is itself a market factor counting against success, but more so, there is always the asymmetry that if someone invests (that is, accepts the optimism in the face of broad risk) and then does something to bring the optimism to fruition, everyone deserves a benefit. But if someone bets against that optimism, there are many other things that that bettor can do to prove out that adverse bet, from spreading rumors to boycotting products. Why again should a community reward this asymmetry?

I'm reminded of the Prisoner's Dilemma, where it turns out to be rational to defect on cooperators. That is, once there is a payoff for defection, then there it is, it's just being cleverly rational not doning anything immoral.

Perhaps part of the reset has to be rooted in the idea of community without badness riding every vector of optimism. If so, perhaps we need to have less of a "rational" approach, looking at personal (and by proxy, corporations-granted-the-fiction-of-personhood) affinities and commitments by which things like "altruism" and "honesty" aren't laughed off as minor placeholders in a PR strategy.

Is it community that keeps the French countryside like that? Or is it some other, strictly financial rationality that requires that somewhere, someone in control is cleverly maximizing their profit by keeping the countryside like that, waiting to be overthrown by someone else, with an even more rational use for the land. Is that all that holds?