Robert Owens
How Could This Ever Go Wrong
By
Jul 9, 2008 - 10:28:07 AM

Paraphrasing one of my favorite philosophers, Dennis Miller, America’s so bizarre our court system needs three choices. “Innocent,” “guilty,” and “you’ve got to be kidding me!”

Some wise guys came up with the idea to give mortgages to people with no down payment, not enough income to afford the house they want, and loans for 125% of the house’s value to cover closing costs and give the borrower a signing bonus, loans with collateral below the value of the loan.  With the extra money, the borrowers, I mean victims, I mean un-indicted co-conspirators can make the first few payments. How could that ever go wrong?

Once the mortgage companies and banks realize they’re holding a bag of “WHAT!” and that these loans aren’t worth the paper they’re written on, the wise guys came up with a solution to the problem, the “buy-out.”   The wise guys go to the original lenders, I mean victims, I mean un-indicted co-conspirators, and say, “Let’s repackage all the individual bad debt into huge chunks of bad debt, discount the cost since it’s “bad debt,” and sell these new investment miracles like used cars.”  The lenders figure at least we can get back a few cents on the dollar.  How could that ever go wrong?

Sure enough, the buy-outs are snapped up by hedge funds and pension plans as sure-fire ways to make piles of money once the original adjustable rates reset from their initial unbelievably low interest rates to their new unbelievably high interest rates.  How could this ever go wrong?  

When the interest rates reset and foreclosures swamp the market, the hedge funds and pension plans realize they’re holding a bag of “WHAT!,” the wise guys came up with a solution to their solution, the “buy-out of the buy-out.”  The wise-guys go to the new owners of the re-packaged loans and say, “If you’ll discount far below the discounted rate you paid for it, we’ll take it off your hands.”  The hedge funds and pension plans, I mean victims, I mean un-indicted co-conspirators, figure at least we can get back a few cents on the dollar.  How could this ever go wrong?

The buy-out of the buy-out works like this: the wise guys go to the original lending institutions and get loans at really low interest rates because the market has collapsed and buy back the bad debt, which is now good debt, having collateral above the value of the loan.  So they end up with commissions and bonuses for causing the problem, commissions and bonuses for solving the problem, and commissions and bonuses for solving the solution and the property too.  

Wait a minute, is this merely the ranting of a frustrated “Sopranos” fan who sees wise guys everywhere?  Maybe there’s a political dimension to all this economic stuff?  

Remember the “Great Malaise” –  I mean the Jimmy Carter administration?  This grossly underestimated calamity gave us the Community Reinvestment Act of 1977.  This Federal Law encourages mortgage lenders in offering equal credit opportunities to their entire market instead of unfairly giving credit only to people who might be able to repay the loans, something with the unfair-sounding name of redlining.  This law was slowly strengthened by George I, the Billary Duelocracy, and George II.  Then the Bush-Clinton-Bush dynasty gave us the Community Reinvestment Act, which not only encourages but mandates the lending institutions make loans to the previously mentioned borrowers, I mean victims, I mean un-indicted co-conspirators.   Couple all this with decades of continuous expansion of the money supply by the Central Bank, and suddenly private home ownership in America is at an all-time high.  How could this ever go wrong?

Now as America realizes we are holding a bag of “WHAT!” somehow no one knows quite how we ended up with a housing bubble?   Right on cue, the usual suspects come up with solutions such as foreclosure holidays, principle write-downs, and further regulation of financial institutions. How could this ever go wrong?

As we look for a wise guy to blame, all the politicians and economic gurus stand in a circle pointing at each other quoting another of my favorite philosophers, Yogi Berra. “I really didn’t say all the things I said,” or how could this ever go wrong?

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