• RSS
  • Facebook
  • Twitter
Chernynkaya On January - 22 - 2011

Richard is an acquaintance of mine, someone I came to know when he worked on my house several years ago. I recommended him to other friends and we kept in touch sporadically. He’s a big guy, an ex- Marine, a family man and a very decent fellow. A few years ago he bought one of these fancy new mortgages with an adjustable rate. Recently his rate reset, has gone up by more than $2,000 a month and he’s fallen behind on his payments. Richard, like more than 4 million Americans is fighting to keep his home.

“At one point, my son had $7,000 in a CD and I had to break it. That really hurt. I was saving that money for his college. I put $2,000 back but it’s hard.”

Richard worked 3 jobs, one in construction, and made a total of roughly $50,000. He got himself into trouble related to construction and needed money, so he took out a loan against his house. A big one–call it $500,000 in round figures. He borrowed that from the bank and they didn’t check his income. It’s a no-income verification loan. Banks never used to do that. He said, “Even though there are a lot of papers that get filled out it’s like you pass a guy in the street and say: lend me 500,000 dollars? He says, what do you do? Hey, I got a job. OK. It is essentially that casual. I wouldn’t have loaned me the money. And nobody that I know would have loaned me the money.”

Richard hasn’t made a payment in almost a year, and his house is in the process of foreclosure.

“Nobody came and told me a lie. That wasn’t the situation. I needed the money. I’m not trying to absolve myself of anything. I thought I could do this and get out of it within 6 to 9 months. The 6 to 9 month plan didn’t work so I’m stuck. The bank made an imprudent loan. I made an imprudent loan. We’re partners in this.”

This imprudent partnership is new, and is at the heart the current financial crisis. For most of the history of banking, bankers wouldn’t have loaned Richard their money either. They didn’t let people like Richard near their money– people with part-time employment, and unpaid debts in their past.  And then, suddenly, in the early 2000’s, everything changed, banks went out looking for partnerships with people like Richard—loaning him half a million dollars without even checking to see if he had a job. What happened?

Well, I happen to know another guy, let’s call him Bill, who worked at a large private mortgage bank with his friend Glen. I met him through mutual friends and we talked to each other at a recent get together. Bill got into the mortgage business straight from his previous job as a bartender. It seemed like a godsend—a great opportunity.  Bill’s job was to buy up individual mortgages (like Richard’s) mainly from mortgage brokers, bundle two or three hundred of them together, and sell them up the chain to Wall Street. When he first started working back in 2000, he’d only buy mortgages that were pretty standard and pretty safe. Mortgages where people had come up with a down payment and proven they had a steady income and money in the bank. But Bill and all the others sold so many mortgages that there came a point in 2003 where just about everybody who wanted a mortgage and was qualified had gotten one.

Just as Bill was starting his new career, the world was starting a new career too. A gigantic pool of money had just gotten started. As I discussed in my Stoner Question—WHAT pool of money? Where did this come from? In this case, it was a global phenomenon. The global pool of money, a huge pool of money out there, which is basically all the money the world is saving now. Insurance companies saving for a catastrophe, pension funds saving money for retirement, the central bank of England saving for whatever central banks save for. All the world’s savings.

The International Monetary Fund says it’s about 70 trillion. Think about all the money that people spend everywhere in the world. Everything you bought in the last year, all of it. Then add everything Bill Gates bought. And all the rice sold in China and that fleet of planes Boeing just sold to South Korea. All the money spent and earned in every country on earth in a year: that is LESS than 70 trillion, less than this global pool of money.

And that money comes with a herd of very nervous men and women watching over the pool of money: investment managers. This herd is nervous because they don’t want to lose any of that money and they also want to make it grow bigger. But to make it grow, they have to find something to invest in. And for most of modern history they bought really, really safe, really boring investments: things called treasuries and municipal bonds. But then, something changed, something happened to that global pool of money.

The IMF said that this number doubled since 2000. In 2000 this was about 36 trillion dollars. How’d the world get twice as much money to invest? All sorts of poor countries became kind of rich making TVs and selling us oil: China, India, Abu Dhabi, Saudi Arabia. They made a lot of money and banked it. China, for example, has over a trillion dollars in its central bank, and there are office buildings in Beijing filled with math geniuses looking for a place to invest it. And the world was not ready for all this money.

There’s twice as much money looking for investments, but there are not twice as many good investments. So, that global herd of investment managers was hungrier and twitchier than ever before. They all wanted the same thing: a nice low risk investment that paid some return. That’s their job as investment managers.

At this precise moment, one guy took one of that herd’s favorite investments and made it a lot less attractive. Our friend, Alan Greenspan. He really is Dr. Evil. In one of his speeches he totally drove that herd of investment managers into a stampede. He said “Hey, global pool of money – screw you.” He said he’s going to keep the Fed Funds rate at the level of only one percent. He told every investor in the world: you are not going to make any money at all on US treasury bonds for a very long time. Graze elsewhere.

I don’t know why, but what they all wanted—and thought were very safe –were more mortgage backed securities. So Wall Street had to find more people to take out mortgages, which meant lending to people who never would’ve qualified before, like Richard.

And so my acquaintance, Bill, noticed that every month, the guidelines were getting a little looser. Something called a stated income, verified asset loan came out, which meant you didn’t have to provide paycheck stubs and w-2 forms, as they had in the past. You could simply state your income, as long as you showed that you had money in the bank.

Bill told me the next guideline lower is just stated income, stated assets. Then you state what you make and state what’s in your bank account. They call and make sure you work where you say you work. Then an accountant has to say for your field it is possible to make what you said you make. But they don’t say what you make, just say it’s possible that they could make that.

Bill said, “Yeah, and loan officers would have an accountant they could call up and say “Can you write a statement saying a truck driver can make this much money?” Then the next one, came along, and it was no income, verified assets. So you don’t have to tell the people what you do for a living. You don’t have to tell the people what you do for work. All you have to do is state you have a certain amount of money in your bank account. And then, the next one is just no income, no asset. You don’t have to state anything. Just have to have a credit score and a pulse.” I can attest to that statement—I’ve been in his office when he did that.

An interesting fact here. Bill’s bank did not care how risky these mortgages were because banks didn’t have to hold on to these mortgages for 30 years, as they had in the past. They didn’t have to wait and see if they’d be paid back. Bank’s like Bill’s just owned them for a month or two and then sold them on to Wall Street. Wall Street would sell them on to the global pool of money. And if you don’t own something–if you’re just a middle-man– you don’t care so much about it, which is how we get half-million dollar, no income, no asset loans.

During this period, there’s another thing going on: housing prices were rising, fast. Lots of people in the mortgage industry had this faith that housing prices, in the US, simply would never go down. So, from the bank’s perspective, even if the worst happens and someone defaults, the bank would then own the house which is now worth even more than when they gave out the loan. I can attest to this belief too—living in Los Angeles, housing prices have rarely gone down; VERY rarely.

All Bill cared about was whether or not his customers–the Wall Street investment banks–would buy those mortgages from him. He was a salesman. And he was under pressure to approve more and more loans, because other guys in his company—their commission depended on selling more loans. And occasionally, those guys would hear about some loan that some other mortgage company offered that they weren’t allowed to offer, and they’d complain to Bill.

Bill said, “Three of them would show up at your door first thing in the morning and say, ‘I lost 10 deals last week to Such-and-So bank. They’ve got this loan. Look at the guidelines for this loan. Is there any way we can do this?’ We’re losing deals left and right. I’d get on the phone and start calling all these street firms or Countrywide and say “Would you buy this loan?” Finally, you’d find out who was buying them.”

So, Merrill Lynch would say no. And Goldman Sachs would say no. And you’d finally hit on somebody and they’d be like “Yeah, we’ll buy that loan.” Once one person buys them, all the rest of them follow suit.

I asked him if he understood how crazy this was. “Yeah. And my boss was in the business for 25 years. He hated those loans. He used to rant and say, ‘It makes me sick to my stomach the kind of loans that we do.’ But it’s a business and when other people are offering those kinds of loans, you are going to offer them too.” Besides, everyone could see that house prices were booming, everything’s gonna be good. And the company was just rolling in the cash, just raking it in. Bill and his friend Glen were making between 75 and 100 grand A MONTH at the height of this craze.

Glen is a lot younger than Bill, and he loved his job—the pressure, the wheeling and dealing. And he PARTIED!  When he wasn’t working, he was spending; going to clubs, drinking Chystal. He had five cars, a 1.5 million dollar vacation house and he made all this money making very large loans to very poor people with bad credit. These people can barely make a car payment and Glen and Bill were giving them a 300, 400 thousand dollar house. But Glen didn’t worry about whether the loans were good. That’s someone else’s problem. And this way of thinking thrived at every step of this mortgage security chain.

Now, all these mid-sized companies, like the one Bill and Glen worked for, were not using their own money to fund these loans. The way it worked was that the small bank, where they worked, would borrow money from a big bank, say Citibank, or Washington Mutual. Bill’s employer would use this borrowed money to buy up a bunch of loans, and then pay back the big bank once it sold the pools to Wall Street. These smaller banks were highly leveraged, meaning even though it only had 5 million of its own dollars, it could borrow 20 times that, 100 million, to buy loans with. So in late 2006, Bill is busily at it, borrowing, buying, selling, paying back, and borrowing again, when the e-mails started coming.

Bill remembers, “We’d get an e-mail from a Street firm, just say Credit Suisse/First Boston. It’d say, ‘As of December 29th, we are no longer buying Stated Income with a FICO less than whatever. There will be no exceptions. Please do not call the pricing desk.’ And you just start freaking out.  Then you start to scramble trying to get this stuff out of the door as soon as you can. You’ve got 20 million sitting there, and you say oh crap, I better get those out the door. Within a week, you can expect to see the same email from all them. You’re scrambling to sell them, going off sheer relationships. Like okay, I’ve still got 10 million of these. I know you’re not buying them anymore. But come on … you can’t just leave me like this. There comes a point where all of them said, we’re not buying anything.”

For guys like Bill and Glen and their bank, that meant that they’d borrowed tens of millions of dollars to buy loans, that now they couldn’t sell. And since the bank they worked at had very little of its own money (just like Richard and the others whose mortgages they’d purchased) they had no choice but to default on their loan. Their bank’s nearly 600 employees were suddenly out of work.

And now we should meet some guys I don’t actually know, I’ll call them Jim and Frank. I heard their story on NPR. They are actual people; they are the Wall Street dudes. Jim created the financial instrument that was central to this global credit crisis we’re in. It’s called a Collateralized Debt Obligation, or CDO. (Bear with me—this will be painless and short.) CDO’s are mortgage-backed securities, those things the herd of investment managers were dying to buy instead of Treasury Bonds. Jim was the guy buying all those mortgages from Bill and Glen.

A mortgage-backed security is a pool of thousands of different mortgages. These are all put together and divided into different slices. Jim uses the word tranche. Some of these slices are risky, some are not. OK, a CDO is a pool of those slices. A pool of pools.

And Jim and most companies like his weren’t buying the top-rated tranches – the safest ones, the AAAs. They were buying the lower-rated, high-risk stuff. Jim’s company was buying tranches that came from Glen’s company. (The guy who hung out at nightclubs. The guy who said he was selling mortgages to people who didn’t have a pot to piss in.)

They call these lower-rated tranches toxic waste. They’re so high-risk, they’re toxic. So, a CDO is sort of a financial alchemy. Jim takes that toxic stuff, these low-rated, high-risk tranches, puts them all together. Re-tranches them, and presto: he has a CDO whose top tranche is rated AAA, rock-solid, good as money. If this seems too good to be true to you, you’re in good company; Warren Buffet said the very logic was ridiculous.

But back in 2005, 2006, the global pool of money couldn’t get enough of these things. And the CDO industry was facing the same pressures everyone else was at every other step of this chain: To loosen their standards. To make CDOs out of lower and lower rated pools.

Jim and Frank, they knew this type of business was a crap, but they were in a competitive business. On that NPR interview they said:

“In 2005, we had an internal debate here because there were two banks coming to us, why don’t you do a deal with us, BBB securities, you get paid a million bucks in management fees per year. And we declined those deals. We just don’t believe those BBB RMBS assets are money-good. And we thought if we do a CDO of those, that’s gonna blow up completely. We were early in ’05 by not wanting to do those deals. People were laughing at us. Saying you’re crazy. You’re hurting your business. Why don’t you want to make $X Per deal, you could make a million dollars a year.”

From 2003 to 2006, the housing market was in a classic speculative bubble. Home loans were easy to get, so more and more people were buying houses. The increased demand for houses caused the price to increase. The rising prices created even more demand, as people started to look at homes as investments. It’s not too hard to convince yourself that this investment will never go down in value. In 2003 and 2004, 2005, they didn’t. You could buy a house with no money down, turn around and sell it a year later for in some areas double what you paid. (When I sold my house, I had made a gross profit of 360% in 20 years.)  People who’d never invested in real estate before started buying multiple properties as investments. There were shows on TV that I used to watch all about how to do it, like “FLIP THIS HOUSE.”  It looked so easy and exciting.

Jim and Frank’s company owned a slice of 16 MILLION mortgages on homes like Richard’s. Each of those homes has lots of other owners–people in other CDO offices around the world–there are lots of them. And other investors. You start to see what a crazy web of confusing interconnections this whole process is. Jim was one link in a chain that connected the global pool of money to its new favorite investment, these residential mortgages, the US housing market, and people like Richard.

Knowing about all those pools and slices of people’s houses, you’d think that the people like Frank and Jim—the investors at the top of the food chain—and people like my friend Richard had no idea about each other. I learned through that NPR interview that they know quite a lot about each other. They just see each other through a computer screen.

Frank and Jim have a software program that actually looks at every one of the 16 million loans. From the NPR interview, where they were interviewing Jim’s IT guy, Steve:

Interviewer: Are you, Steve, seeing lives here? (as Steve shows the interviewer the printout.)

Steve: I definitely see lives. The human drama here is you have someone paying their loan, then something happened. They’ve gone 3 months, delinquent…They got to this point of 6, then fought back to current.

Like here, he was on time for a bunch of months. This one, he was on time, 30 days, 30 days, then he went two months behind, came back. And now he’s just behind. And what’s really hard about this, is you can watch people cycle on and off.

We’re human beings

Interviewer: But these guys are hurting you. Their irresponsibility is costing you money and work.

Frank: That was up to us to think about 3 years ago.

Interviewer: Do you have any anger when you look at this?

Jim: Not at all. This is pure sadness.

This is where the partnership of borrowers like Richard  and investors like Jim has ended up.

Jim  estimated that most of AAA rated mortgage-backed CDO’s that the industry created since 2006, are now worth less than half their value. Some are worth close to zero. But remember to all the investment managers in the global pool of money who bought them, AAA meant safe as government bonds. It’s as if the global pool of money put trillions of dollars in a savings account, came back one year later, and found out that half was gone. Put another way, it’s as if the global pool of money thought it was putting trillions of dollars in a savings account, but really, half of it was going into a furnace.

The money is gone, burned up, never to come back. Easy come, easy go. And that’s what’s led to the new term we’ve all been hearing: credit crisis. The global pool of money still has no idea how much money they lost. How much went into the furnace. And because of that, they’ve totally changed their thinking—for now. They used to be obsessed just with getting some profit, trying to make a slightly higher interest rate return. Now the global pool of money has the exact opposite obsession: SAFETY.

Each link in this chain is at its essence nothing more or less than human nature, human foible, human bondage. No one, really, sees themselves as connected to the millions of others who are living their lives and doing the same things. No one individual can claim they caused all of this pain. But each person played an infinitesimal part. All of out rationales, all of our downright greed for more and more. All the homeowners who wanted a nice house and were offered an easy way to get it; all the mortgage brokers who wanted to make a living getting their customers those loans and finding banks making it outrageously easy for them to sell them; all those banks with sales staffs who were making a fortune providing what seemed like a very safe bet; and all those Wall Street folks doing the same. Don’t forget: money is a fiction, it’s a game, a delusion.

There is this long chain of people that starts with the herd of global investment managers, and these Wall Street guys and ends with people who stand to lose their houses. All along that chain there were Franks and Jims and Glens and Bills, and Richards–bankers and brokers and investors and homeowners. Everybody deluded themselves, thinking they could throw out the old rules. What nobody ever considers is that rules are made necessary to ameliorate human nature.

“Rules are not necessarily sacred, principles are.” –Franklin D. Roosevelt

Post Script:

Richard has applied for mortage modification.  If he defaults on his mortgage, nobody wins. He doesn’t want to leave his house, and the investors who own his mortgage, the last thing they want is to own a house in the Sane Fernando Valley, in a declining market with no buyers. So you think it’d be easy for both sides to modify Richard’s mortgage, do something he can afford. But as we now know, that’s not the case.

Richard told me that meeting with the counselor was the first time someone looked at his finances. Not to say the original broker didn’t have a process. It just had nothing to do with reality. The original loan documents, filled out by his broker stated his income was $16,250 a month. He wishes! Another thing the loan docs reveal is that the broker made $18,500. That’s 18,500 reasons to falsify Richard’s mortgage documents and to put him in a house he can’t afford.

At the end of Richard’s budget process, the math they come up with is fairly stark. Richard makes more money now–he got a new and better job, so he makes an average, before taxes, of $8,000 a month. Which means, after taxes, he brings home exactly enough to pay his mortgage and nothing else. They need to get his mortgage down to 3%, and need permission from the note holder. Of course, they have no idea who that is. Richard’s loan has been bought and sold, and re-sold and put into one of those pools, owned by investors. Maybe an investor like Jim.

For Glen, the mortgage sales manager who – not to dwell on this detail – was living the life of a B-list celebrity, the end came too. He can no longer live the life, can’t pay all his bills

He borrowed some money from his dad. He’s living in his house right now, and working with the bank to try to avoid foreclosure. He’s trying to figure out if it just makes sense to walk away from the house. He hasn’t made his mortgage payments in over a year.

So picture the whole chain. You have Richard. He gets a mortgage from a broker—who had 18,500 reasons to get him that mortgage. The broker sells the mortgage to a small bank, to people like Bill and Glen. The small bank sells the mortgage to a guy like Jim at a big investment firm on Wall Street. This is where the partnership of borrowers like Richard and investors like Jim has ended up.

And it’s why the repeal of Glass-Stegal was such a disaster, and why President Obama and Timothy Geithner, and all the financial advisors have such a hard time trying to fix this mess. They are, for all their credentials and brilliance, just people too. Human nature means ALL humans. No one is exempt, just more or less at its mercy. I hope they remember mercy when they make policy that affects we humans.

http://preview.tinyurl.com/4qhlunn

Written by Chernynkaya

I am an artist and have lived in Los Angeles all of my life, except for a brief hippie period when I lived in SF. I am currently (semi-unwillingly) retired, but have had several careers.

32 Responses so far.

Click here to leave a comment
  1. escribacat says:

    What a brilliant rundown of what happened, Cher. You took an extremely complex process and boiled it down to the simple but critical nuts and bolts. Seriously, if I ever meet someone who really wants to understand the crash, I’d point them at this piece.

    I’d like to add in one more “collaborator,” and that’s the real estate agent. I recall talking to a realtor acquaintance of mine when all this was happening. She admitted that she sold big beige blob houses (my name for them) to people she knew couldn’t afford them. She pressured — even badgered — her mortgage brokers to approve the loans. What did she care? Once she got her commission, it wasn’t her problem.

  2. Questinia says:

    Here is a vid called The Crises Of Capitalism with a story book format and good lecturer.

    http://www.wimp.com/crisescapitalism/

    • Chernynkaya says:

      Q-- that was awesome and bookmarked. First of all, I adore watching people draw (except for those “artists” on public TV who teach you how to paint motel paintings with palette knives).

      Second,as you can tell, I stopped at the very first reason: human nature. Maybe reductionist, but for sure it is from which all else flows.

      And I must tell you, I am very honored by your praise!

    • whatsthatsound says:

      That’s fantastic, Q! So well done and so fun to watch!
      Here’s Elmer Fudd with a tad more commentary on how it’s “supposed” to work…
      http://www.youtube.com/watch?v=2auI6Uz3D8I

      • kesmarn says:

        If onwy they would waise wages and we-invest in machinewy, WTS. But they take thew pwofits and stash them off-show and pay no taxes on them…and we get scwewed in the pwocess.

        • whatsthatsound says:

          It’s even worse! They wun the pwofits thwoo Wall Stweet alchemical pwocesses wike dewiwatives and hedge funds so it GWOSE and GWOSE! After that, what the factowies pwoduce is worth onwy a fwaction of what the Finance Division “pwoduces”. So they don’t care about new machinewy.
          Those scwewy wabbits have scwewed us wabidly and wowawwy!

      • Questinia says:

        Making pwofits wif machinewy! Weich, Wubin, and Gweenspan take note.

  3. SueInCa says:

    Cher
    Great article. This all just makes me feel so sick. I left the financial industry in 2003. I was working for Visa USA so not directly involved in banking, however from 1980 to 1998 I worked for two different banks. Banks that were conservative, loaned money with deference and were upstanding entities. Both are bad news in the financial world now, Citi and Wells Fargo Bank.

    This fund of trillions of dollars is the piece of this pie that alot of people do not get. That money will never be recovered and the housing market in the US will never be the same again because it was not a true financial reality to begin with. What was being passed around was “virtual” money, there was never any green to back it up. Some of us were frugal and did ok in that market. I bought a condo for 245k in 99 and sold it in 01 for 450k. Then I bought another home for 450k and sold it for 525k one year later. The difference is that we put all our gains back into the new homes. The third one we bought, we paid all but 50k down and our current one only has a 20k mortgage on it. Most people did not do that.

    I am going to go out on a limb here and guess Indy Mac Bank for your friends. Coming from the very conservative banking background that I did, I just find it hard to believe all these people did not really know(or think about) what they were doing. I think they all knew somewhere deep in the recesses of their minds but the green was just too powerful.

    • Chernynkaya says:

      Sue, all these people DID know what they were doing. Some chose to do it anyway, some chose to rationalize it, some were in denial. But you are right, they all, on some level, ALL knew this would end badly. Maybe not SO badly, but of course they knew.

      And when you talk about “virtual”money-- couldn’t agree more. (If you get a chance, my “Stoner Question” post was about just that.)

      • SueInCa says:

        Cher
        I saw it below and will read it today. I watched the movie about Enron after all the fallout and the one thing those crooks did was not tell a lie to their staff. They used the term “virtual” when talking about employee stock programs and the value of Enron stock all the time. At the time they were doing so, it went over everyone’s heads, in the aftermath it had a much more sinister meaning, at least to me.

  4. Questinia says:

    I echo the others, especially Khirad and his Taibbi reference, with wow! What a great article. Articulate and remedial-minded without making me feel like a dimwit. You’d make a great teacher as well.

    You are a most generous writer, Cher. This post was like a Katz’s pastrami sandwich. (Gawd I need another one) I digress, but I’m talking about food which is like money.. kinda.

    I am going to read this article several times because it is so enjoyable and informative. Thank you for this!!

  5. whatsthatsound says:

    Fantastic article, Cher! Written in a way that it has both logic and clarity to one as easily befuddled as I, as well as pathos and understanding.

    In fact, I enjoyed it so much that, to show you my appreciation, I would like to wire twenty million whatsis to the account of your choosing!

    • Chernynkaya says:

      Oh, Whatsie! If even one unit of whatsis is something from whatsthatsound, it’s priceless! Thank you my friend.

      • whatsthatsound says:

        When the rest of the world’s currencies were out partying in Bretton Woods and ended up getting lost, whatsis were sitting at home at Fort Knox and never strayed from the gold standard. So twenty million will be enough for you to live on eternally!

        But…..better not quit your day job…..

  6. Khirad says:

    Add your name to the list of Matt Taibbi in writing an article on the complexities of the mortgage crisis I could follow -- even if I had to pause and reread a sentence here and there (like, about the pools and the pools of pools -- and that whole note holder thing at the center of this all -- as Taibbi mentioned -- still blows my mind [it is, for reals, stoner worthy]).

    Indeed I was thinking this the whole time I read this and you finally came to it at the end:

    I think of all those conservatives blaming Richard for taking the loan. Yes, he shouldn’t have.

    But there goes the myth that people know best what to do with their money not the government.

    Please, people do some really stupid, risky things. Especially young people.

    Sorry baggers, but regulations are there to help us all, because we are affected by this chain -- we are all interconnected.

    • Chernynkaya says:

      Khirad-- hardly have the depth of knowledge, but that is so kind of you to say! You said something that I should have included and emphasized:

      But there goes the myth that people know best what to do with their money not the government.

      HELL YEAH!

      And yeah-- that middle part got edited too much. Maybe this will help?

      The people on Wall Street, like Jim, suddenly saw that their securities started to perform poorly, because property values stopped increasing.

      When those investments were made, housing prices were rising. The problem was that even though housing prices were going through the roof, people weren’t making any more money And so the more housing prices rose, the more tenuous the whole thing became. No matter how lax lending standards got, no matter how many exotic mortgage products were created to shoehorn people into homes they couldn’t possibly afford, the people just couldn’t swing it.

      By late 2006, the average home cost nearly four times what the average family made. Historically it was between two and three times.

      Then the problem was that once property values starting going down, it set off a reverse chain reaction, the opposite of what had been happening in the bubble. As more people defaulted, more houses came on the market. With no buyers, prices went even further down. The investments in real estate tanked.

      Remember, even though Jim didn’t trust these loans, the bonds that he turned them into, they performed well as long as housing prices went up, property values were increasing. When they stopped perfroming, Wall St, stopped buying those pools of houses from guys like Bill. Bill’s bank --and thousands of others--went out of business.

      And did I also fail to mention home equity loans??

      • Khirad says:

        Yes, you did!

        But that’s okay, I might go into overload.

        Complex isn’t even the right word for the matrix-like web of the financial meltdown. We might as well be talking metaphysics it seems to me sometimes.

        • Chernynkaya says:

          Funny you say metaphysics-- you do know that that’s what I occasionally lecture on at Cal State Northridge, right? And so funny that you and I-- who really seem to enjoy the matrix of metaphysics--find finance incomprehensible!

        • bito says:

          Khirad, yes it was/is a tangled mess, but there was a bunch of time and money spent on deception, deceiving, blaming to obscure many simple facts. In other words millions were spent to come up with: “Oh, look, a different squirrel over there!”

          • Khirad says:

            Well, yes, of course I’ve long suspected the obfuscation was deliberate.

            Make it so complicated we can’t understand enough to be outraged.

            And then say, look! It’s big government to blame, not the banks!

            We as a nation, the Tea Party especially have Stockholm Syndrome.

  7. kesmarn says:

    Cher, you’re not only a wonderful writer, you’re a phenomenal teacher. As AdLib said, you’ve been able to take a complex situation and present it in clear terms without dumbing down the content. That is a gift.

    One of the most maddening aspects of the whole financial collapse has been the way that Dubya, Goldman-Sachs, the ratings agencies and the banks have gotten off almost entirely scot-free.

    The mythology that the RW has put out there is that the people who are responsible for this mess are: Barney Franks and Chris Dodd, Barack Obama, and a bunch of fat, lying, greedy (usually minority) poor people who falsified info to get mortgages on luxury homes that they knew full well they could never afford, and then walked away from when the going got tough.

    And it’s amazing how well that has stuck. Even with the working class people who have been victimized the most.

    • Chernynkaya says:

      Thank you, kes! I have to give a ton of credit to NPR-- but I can’t remember exactly which airing it was. I have been listening to them explain this for a while, and they finally got it through my head-- and I HATE financial stuff. It’s funny, after 2 years of listening, I finally “got it” --to a degree-- and was so excited that I understood, I had to share that.

      I think the reason it is so easy to scapegoat the homeowner is because that is the only link in the chain most people can comprehend. And it’s laziness too-- the other links are beyond people’s interest. From my POV, the homeowners are the LEAST responsible for this crisis.

      As I wrote to Mighty, I am intimately familiar with the bottom end of this Chain of Fools-- I was underwater from a bad mortgage too, and I know the mortgage broker, and the banker like “Bill.” One is the husband of one of my dearest friends. He made his money not from banking-- that was almost an afterthought for him, but from INFOMERCIALS! kinda fits, huh?

  8. Mightywoof says:

    Wow -- just Wow, Cher!! Following what has happened over the last few years is not an easy thing to accomplish but to be able to follow and then re-write at such a personal and understandable level is pure genius ……….. huge kudos to you!!

    Yeah AdLib -- Justice; where the heck did that go anyway.

    • Chernynkaya says:

      Much appreciated, Mighty! The fact is, I was in a situation similar to Jim’s, although his was on a much larger scale. I KNOW these people. And, as I replied to AdLib, when I don’t understand something, I just write simple sentences about it, and then string them together-- I guess it worked! I was determined to try to understand this.

    • AdLib says:

      Truth, Justice and The American Way…that combination can only be found in fiction right now…

      ” height=”400″ alt=”supes” />

  9. AdLib says:

    Phenomenal article, Cher! Just amazing, you have in such a straightforward and human way, simply described what happened to cause the economic meltdown and the interconnectedness of it all.

    Wow. So damn well done!

    And may I add one additional element? The corruption and manipulation of the rating agencies. The “market makers” like Goldman Sachs would shop around CDOs that were so complex that the rating agencies literally didn’t understand them…but GS would wave stacks of money under their noses for their fees which somehow gave them renewed confidence that they could assess them as AAA.

    Without those AAA ratings, as you so effectively describe, this Global Pool of Money would never have been invested in these offerings.

    This is part of the real evil of Goldman Sachs and their ilk. They intentionally hired and commissioned mathematicians and scientists to design the most complicated and indecipherable formulas and structures for financial instruments precisely to make it impossible for their claims of how sound they were to be refuted by rating agencies.

    They are criminals who knowingly committed fraud and devastated our economy and nation in the process yet their punishment is record billions in bonuses to all of their execs.

    There is something profound still missing from this focus on jobs and the economy…justice. It’s been said that this is a nation of laws but one major cause of decay in our democracy is the lack of accountability for the rich and powerful.

    Bush and company got away with violating the Constitution and the Geneva Convention, they lied, stole, tortured, spied on us, opened the Treasury to their cronies, are responsible for hundreds of thousands if not millions of innocent lives being destroyed…and yet holding them responsible was “off the table”.

    This GS scum trashes the present and future of this nation to stuff their pockets and here too, criminal prosecutions for obvious fraud are not only off the table, the slam dunk criminal charges they had against GS were settled for hundreds of millions…a drop in the bucket compared to the billions they stole from us and others around the world. Some punishment, “You stole billions from us and we’ve got evidence proving it! Pay us $300 million or else we’ll prosecute you! That should teach you a lesson!”

    Yep, I think it’s taught them very well.

    With the new tone in DC of “getting along”, I think it’s less likelier now that there will ever be a Justice Department enforcing justice on those who were behind this fraud.

    A renewed respect for justice could make a big difference in the still lawless world of finance that’s operating no differently today.

    p.s. The current bubble is the gold market, it has been so inflated by fear and economic uncertainty. If the recovery kicks in soon as it should, gold prices will start to soften then as fear sets in, a rush on selling will collapse it and all those Glenn Beck fans will be clamoring for the safety nets their Tea Party Congresspeople are seeking to destroy.

    • Chernynkaya says:

      AdLib-- about JUSTICE-- and the lack thereof:

      I just read Frank Rich’s column talking about the popularity of “True Grit.” He’s on to something! (But you have to get to the second page before he makes his point.)

      http://www.nytimes.com/2011/01/23/opinion/23rich.html?pagewanted=2&ref=general&src=me

    • Chernynkaya says:

      Thank you AdLib-- very glad you liked it! When I m trying to understand something, I HAVE to write it plainly--for myself! I should always try to write like that.

      …but GS would wave stacks of money under their noses for their fees which somehow gave them renewed confidence that they could assess them as AAA.

      As I tried to makes sense of this situation, I found that this(above) was at the root. And it’s so trite, but trite BECAUSE it’s almost always the case. I am as guilty as the next shlemiel. I can almost see that the global herd demanded that GS create that instrument. They were hell-bent on spending and getting MORE money. And I ask, “WHY did they “need” to invest in anything? WHY couldn’t those investment managers have said, “Gee, T-bills pay only 1%--instead, let’s just invest in our PEOPLE here in India or China? Lets have no more poverty.”

      Also, I edited out a section about the rating agencies--it was too long as it is-- so I am very grateful that you added that aspect!

      But to me, what you wrote about JUSTICE is extremely important to me. I could talk about that all day--about the repercussions of NO justice. I think that until we deal with that rock-bottom, BASIC issue, this country will continue to gyrate and wobble, never finding equilibrium. It is that essential.

      • bito says:

        Cher, Do you know how or why the credit rating “companies”
        fared in the financial reform legislation? If my memory serves, always questionable, but wasn’t the regulation on them watered down to get a couple of Republican votes?

        Excellent post, Cher!

        • Chernynkaya says:

          Bito, a hundred years ago, I worked as a VP in marketing (actually I was a glorified art director) for an annuity company. When our ratings were downgraded by S&P or Moody’s, our CFO would call them and try to persuade them as to why we shouldn’t be rated less than at least A. My guess it that those relationships--the trust between our CFO and someone at the rating agency--has something to do with it. Also, now we know those agencies relied on the wrong data. That same historic data that had nothing to do with these new kinds of mortgages.

          As to their role in fin/reg, this is all I know:

          http://www.financialregulationforum.com/wpmember/credit-rating-agencies-the-pressure-mounts-on-the-oligopoly-4029/

          And thanks!


Leave your Comment

You must be logged in to post a comment.


Back to top
PlanetPOV Tweets
Ongoing Stories
Features