The United States has had as much of Phil Gramm as we can stand. While Americans expect almost everyone to be on somebody’s payroll, we are now at a point where we wonder about two main subjects: “Who was paying Phil Gramm for stupidity?”, and “Where am I going to be working next week?”

As chairman of the Senate Banking Committee from 1995 through 2000, Phil Gramm was Washington’s most prominent and outspoken champion of financial deregulation. He played a leading role in writing and pushing through Congress the 1999 repeal of the Depression-era Glass-Steagall Act, which separated commercial banks from Wall Street.

(President Bill Clinton repealed the Glass-Steagall Act which had prevented the coupling of investment banking and lending. To be exact, on November 12, 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act of 1933. One of the effects of the repeal is it allowed commercial and investment banks to consolidate. Economists have criticized the action.)

Phil Gramm also inserted a key provision into the 2000 Commodity Futures Modernization Act that exempted over-the-counter derivatives like credit-default swaps from regulation by the Commodity Futures Trading Commission.

Oh my Phil. When did you realize the brakes were burnt out on that freight train?

Credit-default swaps took down AIG, which has cost the U.S. $150 billion thus far.

It kinda makes you wonder who was padding Phil’s pocket. Don’t you love a politician that forgets about those he was elected to represent?

Christopher Dodd is now the chairman of the Senate Banking Committee. Richard Shelby is the ranking member.

Dodd said: “Under my chairmanship, we have worked to protect consumers from greedy credit card companies and sleazy lenders – and we have more work to do, to create an independent consumer financial protection agency.”

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According to a TIME 24/7 article this morning, “Someone who took out a subprime loan in 2003 is the “patient zero” who began the great recession.” A single borrower set off the series of events that may lead the economy into its greatest downturn since The Great Depression? Blaming the financial meltdown on one borrower is probably the most ridiculous thing I have read since mortgage lending hit the skids. I have a novel idea, “Why don’t we call the mortgage lender or the underwriter “Zero”?

“Patient Zero” (P.Z.) supposedly obtained a subprime mortgage in 2003 to buy a house in Stockton, California. The amount financed was $250,000 and required no down payment. Interestingly enough, according to the article, P.Z. made payments for more than 3 years before the interest rate adjusted. The actual default was after a job loss, not an immediate default because of the interest rate and payment adjustment. Oh yes, an interesting point was that not long after P.Z.’s mortgage defaulted, another mortgage in the same pool defaulted.

Borrowers may default, refinance their mortgage, or sell the home. Those are calculated risks and have always been a part of the equation. With conservative underwriting standards and consistent mortgage products the risk was manageable. The equation became skewed when adequate documentation and standards slipped and the interest rates and payments changed every time the wind blew.

Comparing a P.Z. to a Typhoid Mary is extremely unfair. The pool was contaminated before the default. The risk was excessive and misrepresented to investors. It took a Lender, Mortgage Backed Security, and Risk Assessment to bottle, distribute, and sell the poisoned product to borrowers and investors alike. The financial crisis today is not a Typhoid Mary, it is Biological Warfare. The subprime mortgage market was developed to target minorities and exploited a niche previously undeveloped.

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As we finish the last day of 2008 the reality of the matter is that 18 months have passed since red lights came on and warning sirens sounded in the summer of 2007. Letting the air out of the mortgage bubble, and subsequently starting the collapse of Wall Street, the summer of 2007 was only a prelude to bigger unthinkable things to come.

We cautioned our friends about shares of Fannie Mae and Freddie Mac, warning them to dump all investments. Instead, we were told that our predictions were overly cautious. We told our son to refinance his adjustable rate home loan as soon as possible, which he did. By August 2007 I told my wife that stocks would settle out around 8500 after all was said and done. For years I said 12,000 was too high and not sustainable. The Dow will start 2009 at 8780, more or less.

Finger Pointing Continues

Finger pointing continues as we end 2008, and no doubt will be part of New Year’s eve discussion at parties. Brokers, predatory lenders, investors, securities dealers, speculators, and regulators all share the blame. Don’t forget ratings companies, wholesale lenders, and lawmakers while toasting those responsible. It was a period of gluttony unhampered by professionalism, and a time for self-enrichment unimpeded by ethics or good business sense.

As we looked forward from early 2008, my wife said credit cards would come under more pressure. I remember saying that 2008 might bring the nation back to the 1970’s, when decent credit rewarded people, and others could not get a credit card, buy a car, and would never dream of buying a house. Is that such a bad thing?

The United States embarrassed itself in front of the world, spreading tainted commercial paper around the world. In previous years people were rewarded for higher education, often obtaining a better job, stability, and greater earning power. With those benefits came better credit.

Subprime and Education – An Analogy

We all receive spam email offering a college degree for cash. Consider it the subprime of education, if you will. While in college, some of us saw people who cheated their way along, learning little in the process, but receiving the same degree as their peers. Each cheapens that for which we worked long and hard. I shall attempt to classify each.

Predatory lending is the spammer offering to sell a college degree. Subprime is the cheater that was actually in college, but sought the easier and less honest approach.

Officials tasked with accreditation of the college or university are the “Friends of Madoff” group. Often too chummy and very secure in their tasking, nobody looked for cheaters and spammers. The focus was on the institution, not the students. (In business we call them customers, borrowers, or clients.)

Admissions standards dropped as appraisers implied that anyone and everyone was qualified to attend Harvard or Yale, or any other college or university.

Bond raters implied that all graduates, including cheaters, spammers, scammers, and the like, were fully qualified to be graduates of Ivy League schools, and those schools were perfectly accredited.

Predatory lending became acceptable, and with it came a new name. The word Subprime was even added to the dictionary. With such shallow and stupid blessings, people were told to believe that everything was legal, sanctioned, inspected, approved, and very proper. Nothing could be more wrong or farther from the truth.

Solutions in an age of instant gratification became one of selling what the market – and investors – were buying, and for which they were paying top dollar. Morals were sacrificed as ordinary people sold America. Higher earnings could not last, as those who aided in the fleecing of America would soon discover. Had they simply left it alone, the real estate bubble would have be confined to California, Arizona, Nevada, Virginia, Maryland, and Florida.

Perhaps it is unfair to use an analogy such as higher education when discussing housing, home loans, and finance. It is a good analogy, when those of us with a college degree, be it a Doctorate or undergraduate degree, see our education cheapened and made worthless over time. That is what happened to the pensions, investments, and home equity of many people.

Final Thoughts – Mortgage Blues 2008

Perhaps we should not feel bad for those who knew they had no business buying a home. Perhaps we should rail against bailouts for those who supported and enabled such stupidity.

In the end some will stand out from the others, shown for what they really are, and while exposed and shamed, they will offer to sell you a college degree at a reduced price, all the while proclaiming how they will not deny you three times before the cock crows.

(Mathew 26:34,74-75) – “Jesus said to him, “Truly I say to you that this very night, before a cock crows, you shall deny Me three times . . . (74) Then he began to curse and swear, “I do not know the man!” And immediately a cock crowed. (75) And Peter remembered the word which Jesus had said, “Before a cock crows, you will deny Me three times.” And he went out and wept bitterly.”

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Republicans wearing blinders want four more years as they claim the United States has experienced eight years of growth. What’s up with that? Consumer confidence sank to its third-lowest level ever in June, according to a study released Friday by Reuters and the University of Michigan. Democrats look back to a balanced budget of years ago during the Clinton era, but it didn’t help Hillary Clinton. Americans had Bob Barr running for president who claimed to lick whipped cream from two women’s breasts (there are photos.) Ralph Nader is in the race too, but may be unsafe at any speed. Oil prices climb wildly as Americans are afraid of Nigerians and Mumar Gadfly (sic) of Libya. Rebates were a failure. “US consumer spending rose more than forecast in May as tax rebates drove the biggest gain in incomes in almost three years” claimed one article. Reality check for Bush: you gave out $78 billion as of today and consumer confidence is the third lowest ever recorded.

Are we third-world lemmings in training or are we simply holding our collective breath? Whipped cream, Nigerians, speculators, Iranians, and George W. Bush. They are all unsafe at any speed. Perhaps we need a president that will hire Indian and Chinese engineers to create alternative fuel vehicles and more refining capacity. Just look at our space and rocket program. We brought Werner Von Braun to the United States from Germany. What does any of that have to do with the mortgage market? consumer confidence is down because the mortgage market has flattened out. My home and yours now competes with foreclosures as we try to sell. The neighborhood looks bad because Wells Fargo will not pay a contractor to mow the foreclosed grass next door. Curb appeal is gone, and so is my sense of humor.

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Fed chariman Ben Bernanke still won’t admit that the United States is in a recession. On the other hand More than once in the past, three consecutive months of job losses have marked the start of a recession. �It is our view that we are already in one,� said Drew Matus, a Lehman Brothers economist, offering a view widely held on Wall Street. The view is also widely held by Main Street. Americans are not stupid. Statistics only count those who did not fall off the back side, still unemployed and without unemployment benefits.

I estimate real unemployment at nearly 12 percent. It is not a number the government wants to see. During the dot.com bust, friends became pizza delivery drivers after once earning six-figure incomes. These were people with three children and nice homes. Technically they are now employed. Also compounding the problem are illegal aliens working in the United States. What happens when they become unemployed? Cash workers who pay no taxes can also be laid off, and those people do not count. Every migrant, vagrant, alcoholic, and day laborer who becomes unemployed simply adds more burden to food stamp or SSI programs.

Some say there was no end to the recession of 2001, as the government allowed mortgage lenders to tap the equity in American homes to stimulate the economy in a false way. In retrospect I tend to agree. It was a failed experiment as evidenced by problems in 2007 -2008. But unemployement numbers – either the government’s or mine – are not experiments. These are real people. If you think $3.50 gasoline and $4 diesel fuel won’t make matters worse you are dreaming. Actually, some workers who cannot afford to drive to work might benefit from getting fired so they can draw unemployement too. But good luck finding another job.

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A great article by Huliq focuses on the mortgage blame game. “You can blame who you want but mortgage lenders made these products available to mortgage companies who hired individual mortgage brokers with no formal education to sell the mortgage product that made the mortgage lender, the mortgage company and the mortgage broker the most money with total disregard to the consumer” says part of the article. We recommend reading the entire narrative, as this assessment is right on the money.

Anyone who ever worked in sales knows the quote is absolutely correct. There is little concern for long term impact on the consumer. Those who have been in sales also know sales managers often tell sales reps (in this case the mortgage brokers) about the upside of what they are doing. When that fails, the standard motivational ‘talk’ includes “if you don’t do it someone else will do it, so make the money.” Some sales jobs are not for the weak at heart, or those with a consciense. To that end we define ‘consciense’, courtesy of Wikipedia:

Conscience is an ability or faculty or sense that distinguishes whether our actions are right or wrong. It leads to feelings of remorse when we do things that go against our moral values, and to feelings of rectitude or integrity when our actions conform to our moral values. It is also the attitude which informs our moral judgment before performing any action. The extent to which such moral judgements are based in reason has been a matter of controversy almost throughout the history Western philosophy

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President George W. Bush today will announce a freeze on some subprime mortgage rates in an effort to stop a wave of foreclosures undoing the six-year expansion. Some say Bush’s six year expansion was a manufactured extension of the recession of 2001. As part of the deal the states are expected to help, but experts say it will cost the government if the states help out. Only two days ago a federal appeals court judge said states cannot investigate federally charted banks over shady or questionable mortgage lending.

A federal appeals court on Tuesday upheld a lower court�s 2005 decision that barred the New York attorney general�s office from subpoenaing documents and instituting enforcement actions against national banks as part of an investigation into lending practices. In that case New York wanted to investigate allegations of discrimination. The reason is not important at this point because the ruling effectively blocks any and all subpoenas from any state. The OCC, a federal regulator that should protect us and investigate complaints, is the agency that blocked state efforts.

Many people suspect that Bush fueled his so-called expansion using our home equity and collaterized credit card debt but failed to see the train wreck that would happen. Economists and historians said the amount of debt distortion would be directly proportional the the ensuing crash, and that forecast proved to be correct. Now it is full speed ahead once again. Federal regulators have been well insulated by Tuesday’s court ruling. Federally chartered banks have thus been well insulated. State regulatory action has been shut down.

Now homeowners and communities will be rescued by the same people who caused the problem. Like a thief that tries to give the money back after robbing someone at the ATM machine, somebody might recognize the thief when they see his picture on television. Did we really have an expansion? When did predatory lending push the envelope to become the norm? Wasn’t it about the same time (2005) that the OCC went to court to tell the states to back off? That was the same year Bush signed the new bankruptcy law, and tightened up the ability to file class action suits. Both changes were based on imaginary ‘abuses’.

The scam was so transparent, the warnings so clear, and the setup so blatant that Bush’s imaginary expansion might come to an end this time. The economic impact will continue to trickle down to your neighborhood and mine, even if only as a drop in home values, so perhaps we will be forced to help anyway.

“Politicians want to look like they are doing something while not doing something,” says Joseph Mason, a professor at Drexel University who studies banking regulation and capital markets. “This plan fits that perfectly.”

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As lawmakers, Treasury Secretary Henry Paulson, Housing and Urban Development Secretary Alphonso Jackson, a slew of presidential hopefuls, and many others weigh in on a solution to the subprime mess it is clear that President Bush is in a jam. While some realists say the recession of 2001 never ended, others claim the manufactured wealth needed for U.S. economic growth was sure to fall apart. That it did, but during the build-up President Bush protected businesses, predatory lenders, banks, and investors with new legislation such as the 2005 revision of bankruptcy laws.

Now many pro-consumer ideas are on the table. Admissions that this is not a ’subprime’ problem takes the focus off of people with less than stellar credit. But where is the focus now? Like a child’s game of dodgeball or musical chairs the music may stop playing on 6 December. For once Bush may not be able to protect those who got us into this problem to begin with. The Bush administration expects to make an announcement Dec. 6th. Paulson said “I am optimistic that we are going to have something to announce by the end of the week.’

When the announcement is made investors are sure to scream. Contracts are in place, and the delicate job of balancing future U.S. growth against legal issues will be interesting. Without a solution U.S. growth is sure to stall. I am writing this on the evening of December 3rd, but I guarantee if history is correct the Bush administration will throw money at the problem. That is money we do not have.

The fact that Bush is in a jam between business interests and real people – like consumers and home owners – reminds some of post-Katrina. Some alleged that Bush did not like black people. Others said Bush didn’t like poor people. Now that the mortgage industry has imploded, we can look back at financial legislation since hurricane Katrina to see that, given a choice between business and real people, Bush just doesn’t like people.

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Some say the U.K. is a warning to the U.S. but the news sounds about the same. One third of all U.K. homeowners will face big increases in their house payments. A report released yesterday said approximately 5.5 million people in the U.K. would be effected. Many fell into the subprime trap because of divorce, employment issues, or other unforeseen financial issues. While the U.K. classifies adults as ‘non-standard’ the United States also faces many subprime and ALT-A problems as adjustable rate mortgages reset. The United States classifies the problem as ’subprime’ but analysts say the analogy no longer holds up to examination. Here is why:

“Subprime suggests people with less than stellar credit caused the credit crunch around the world. Such a classification, and total volume of of subprime losses suggest a much bigger problem” said Household – HSBC Watch.

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State Division of Banking offices examine the soundness and lending practices of licensed mortgage companies and are designed to prevent unscrupulous lenders and brokers from taking advantage of consumers. Watchdog organization Household – HSBC Watch called for a national database that would enable all states to coordinate data and perform trend analysis. “If an examiner sends a problem to a state Attorney General the AG’s office should be able to immediately see if the problem exists in the other 50 states” said the group.

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