Janet Tavakoli, President, Tavakoli Structured Finance, Inc.
The economy is in trouble because banks borrowed massively, and they borrowed many multiples more than they could afford. CNBC acts as if over-borrowing by U.S. consumers created a global financial crisis. This myth protects Wall Street banks.
Predatory Lending: Consumers Need Protection
At times individual borrowers overreached, flipped houses, or lied about income. But those weren’t our only problems. Borrowers were often targeted and actively misled. Wall Street supplied the funds to predatory lenders. Then it packaged up those loans into phony securitizations.
In the past decade, lending fraud lawsuits against Ameriquest and FAMCO made the news. Instead of cracking down, regulators removed the brakes. America suffered an epidemic of predatory lending after that.
By the time of Wall Street’s 2008 bailout, delinquencies on subprime mortgage loans made in 2005 and 2006 exceeded 37 percent and were climbing. The brand new (at the time) 2007 loans had a default rate of almost 26 percent and climbing. The loans made in 2007 defaulted almost immediately, a classic situation for fraud. That doesn’t include other risky mortgage products made to borrowers with better credit. Meanwhile, subprime loans made by Warren Buffett’s Clayton Homes division were performing just fine. The delinquencies were in the low single digits and constant.*
Wall Street banks bear most of the responsibility for this debacle. Most of the CDOs that came to market in 2007 defaulted very rapidly. At the end of a Ponzi scheme, the schemers speed up (as they did in 2007), because they are desperate to hide losses in new securities. Wall Street banks disguised the risk on their own books, passed the problem to investors, or bet against their own trash to make even more money.
CNBC Blames Taxpayers Not Banks’ Titanic Losses and Enormous Bailouts
I appeared on CNBC on Tuesday to discuss consumer protection. Everyone else in the clip below is on CNBC’s payroll.
CNBC editor Rick Santelli wants to blame taxpayers for a problem created by Wall Street Banks (and denies predatory lending is an issue). He suggests losses are the fault of individual borrowers, yet is silent on the titanic losses and enormous bailouts for the Wall Street Banks.
CNBC contributor Bill Isaac has long been a denier of mortgage problems. In 2007, he told Mortgage Banking:
“I believe that [the housing market’s] already showing signs of leveling out. I believe that over the rest of 2007 and 2008, we’ll be seeing the market stabilize and improve. Generally as a nation as a whole, I don’t have any concerns.”
By 2007, dozens of mortgage lenders had already imploded.
Isaac is wrong again when he says banks were not involved. Here are just a few examples: JPMorgan Chase bought troubled Washington Mutual and Bear Stearns. Goldman Sachs ran Goldman Sachs Alternative Mortgage Products. Bank of America bought predatory lender Countrywide and Merrill Lynch.
Hundreds of billions of losses–not merely paper write-offs, actual losses–have subsequently occurred due to foreclosures and delinquencies. We’ve had a negative feedback cycle of falling housing prices leading to more foreclosures and delinquencies. Denial is not an option.
Give Taxpayers an Even Break: Banks were Responsible
Wall Street got bonuses, taxpayers paid the bill, America got a deep recession, and the world got the worst financial crisis in history. Financial holocaust deniers obstruct solutions that can help prevent the next crisis and would stick taxpayers with the bill again.
*More details can be found in my book on the financial meltdown for a general audience, Dear Mr. Buffett, and my book for professionals, Structured Finance.