An article by Diane Francis appeared in the Financial Post on Saturday, November 17, 2007. Titled “Subprime mess is a crime story” the article outlined key issues. Diane said “At the top were mortgage lenders, then Wall Street and others who exported junk debts to lenders around the world after prettying them up. At the bottom was a corrupt system that handed out mortgage broker licences like driver’s licences, and then handed out mortgages like candy at Halloween. In between were crooked appraisers and organized crime.” (see her article) Why didn’t regulators and the Feds get involved? One answer may surprise you:
After September 11, 2001 the U.S. Government needed to move the economy forward. Lower interest rates helped to stimulate the economy, and mortgages were attractive. Refinances gave homeowners the cash they needed for improvements and debt consolidation, and the money went back into the economy. Lenders were given a free pass. Under the party line of “helping America” the U.S. government looked the other way as new risky mortgages were invented. Lenders and Wall Street were told that they were great Americans, single handedly reviving the economy while making America strong again. An examination of interest-only loans, no-doc loans, and skyrocketing home prices in the Washington DC area and California caused little concern as long as the economy looked good.
Economists openly said that the amount of debt distortion would be relative to the amount of the resulting crash which would undoubtedly take place. That statement was based on historical analysis dating all the way back to the depression and crash of 1929. The Bush administration decided to make the economy look good at all costs. To hell with history. “If you want to know what will happen in the future one must study the past” meant nothing. We see the results today, but many questions remain unanswered, such as:
What did the U.S. government offer lenders and investment banks in return?
What did Alberto Gonzales’ U.S. attorneys really know before they were fired?
Why did ICE and Homeland Security permit new mortgages for illegal aliens subject to deportation?
Why was Ameriquest owner Arnall appointed as ambassador to The Netherlands?
Why was the OCC painted as inept, and why was Julie Williams replaced?
Why did the OCC attempt to block state laws and regulatory efforts?
Why did the Bush administration see the need for new bankruptcy laws?
Why did the Bush administration see the need for tougher class action laws?
Why did Alan Greenspan retire when he did?
Why did William Aldinger and John Bond leave HSBC when they did?
What is the relationship between Wells Fargo, Household International, and the Wells Fargo HSBC Trade Bank?
Why was a London based bank (HSBC) allowed to buy heavily into the U.S. subprime market?
Why was the Bush adminstration receptive to changes in Soldiers and Sailors during time of war?
Why did the SEC change policy on loan syndication in 2005?
Why did the Federal Reserve Board change policy on derivatives and syndication in 2005? (see it)
What was Jack Abramoff lobbying for? (Documents show Abramoff’s team had extensive access to Bush administration officials, meeting with Cheney policy advisers Ron Christie and Stephen Ruhlen, Ashcroft at the Justice Department, White House intergovernmental affairs chief Ruben Barrales, U.S. Trade Representative Robert Zoellick, Deputy Interior Secretary Steven Griles and others.)
There are many questions without answers. The Bush adminstration allowed, or signed into law, many new changes in 2005. By 2007 everything fell apart. Nobody in the world gets something for nothing. Today 200,000 people are without jobs as the mortgage industry fell apart. I personally find it hard to believe that subprime, and subprime alone, caused this problem. Aside from lack of regulation and intervention by the federal government, and with a strong desire to shape the U.S. economy, toughening of bankruptcy and class action laws tell me the government knew that initiatives of 2001-2005 would spiral out of control.
Look at one small fact that tells a big story. A foreclosure results in a 1099C for the foreclosed homeowner, leaving a big tax debt. A 1099C is only overlooked if the homeowner is declared insolvent, otherwise the evicted person owes a big tax debt. How are they going to pay it? Just like many other fiscal tricks, 1099C’s without bankruptcy will look like the federal government has huge receivables on the books. In truth they will be almost worthless, adding insult to injury for those evicted and foreclosed upon.