I am a little puzzled at the charge of being “partisan” or of passing “value judgments” because I am not, nor did I claim to be non-partisan or value-neutral on this issue. But perhaps I was a bit too restrained and subtle in my piece. What I really wanted to say was this: Shame on those disgusting, greedy, mean-spirited, selfish bastards for setting up a corrupt system which was designed to take advantage of the poor and the ill-informed, for making out like bandits while the going was good, and for then walking away from the loss, smugly talking about how it was the subprime borrowers’ fault that got them into this mess in the first place. Now that we’ve got that out of the way...
I shall not discuss the issue of whether my mis-spelling of Stearns takes away my right to analyze the crisis, but I will pause for a bit on the quibble with my use of “securitization”. Securitization is a fancy word for the creation of fictitious products called “securities” (which are themselves based on actual assets that are expected to generate income). This is the way the securities game was played: the get-rich-quick Wall Street crowd peddled these subprime loans that they knew very well were predatory, created a bunch of abstract securities by using the mortgage as collateral, packaged them in fancy bits called MBSs-CDOs-CMOs-whatevah, persuaded credit rating agencies to give AAA ratings to some of the securities, sold these to investors, exploited accounting loopholes to create shell companies called Special Purpose Vehicles (SPVs) in the Cayman Islands and other tax havens, and transferred the junk securities to the balance sheet of the SPVs. So by the time they were done, they had taken crappy mortgages and converted them into separate “tranches” – some became AAA securities, some lower rated ones, and some were just trash that was moved off their own books (and by the way, does anyone really believe that they did not know exactly what they were doing?). And then they did it again and again. They also gave themselves fat salaries and huge bonues (try the $490 million Dick Fuld made during his tenure as the CEO of Lehman), and engineered their own payoff in a way that allowed them to have it taxed at the 15% capital gains rate as opposed to the 35% federal income tax rate.
I agree that it is “convenient for society to blame this mess on Wall Street” but it is far more convenient to shift the blame on to “society” which should somehow “accept its own responsibility for what's happened”. What was “society’s” responsibility exactly? To divine how the opaque world of Wall Street worked? To turn away from what was being masterfully sold as a fail-safe wealth-making opportunity? To not have “voted for a government that believed in minimal oversight” (let us leave aside the fact that less than 2/3rd of the population is of voting age, half of them vote, and half of those did not vote for this administration)? This is a logic of collective punishment that also makes a scapegoat of the victim.
Agreed that it was the (very understandable) desire to make money on increasing property values that made several middle- and working-class families jump on the bandwagon. Agreed that they signed up for loans that they did not realize they couldn’t afford to pay (more on that below). Call this greed if you will, though you should keep in mind that buying a home isn’t just about upscaling your living digs from a crummy apartment to a home with a yard. Given how
But to equate this desire with the rapaciousness of the financial executives is a travesty. You can’t seriously believe that the “greed” of the poor who were eager to acquire homes and the “greed” of the masters-of-the-universe are equivalent, unless you truly don’t understand how power works.
Subprime lending – a fancy term for giving high-interest loans to the poor – was turned from a tiny niche in 1990 into a huge 20% slice of the market by 2006. It would take too long to list the ways in which these loans were predatory, but here are some of them. Seventy percent of these loans came with a pre-payment penalty; in other words, you were stuck with them even when you realized that you’d been duped. You couldn’t pay them off, refinace the loan, or pay on an accelerated basis. The loans were sold with teaser rates that were designed to “balloon” after 2 or 3 years and written in ways that made them appear cheaper than they turned out to be (by hiding taxes, insurance, and delaying interest payments). Worst of all, there was a deliberate effort to target buyers in poor communities through hard-selling and false advertising. Though they are being depicted as irresponsible and reckless, the subprime borrowers were – for the most part – victims of an elaborate scam.
The burden of this crisis is already being disportionately borne by those who were disadvantaged to begin with. Consider the following. In a population that is 66.4% white and 13.4% black, 54.7% of high-cost loans were given to blacks and 17.2% to whites. These numbers partly reflect the fact that black communities tend to be poorer than white communities. But there is also plenty of evidence to show that black families that could have qualified for a prime loan were steered towards and bamboozled into taking loans at subprime rates. See the report “State of the Dream” put out by United for a Fair Economy for more details.
Like I said, shame on the perpetrators of this, yes, unscrupulous scam.
P.S. This isn’t a disclaimer that absolves me of responsibility for this analysis, but I should say that I am no expert on this issue. I am eager to be educated by those who know better, but I think that the broad contours of this drama aren’t that difficult to figure out. By the way, if you want to read something I wrote on stuff I do know very well, here is my tribute to Ahmad Faraz, Pakistani progressive poet, who died recently:
P.P.S. I plan to cannibalize this for a follow up Q&A piece.