What were these assets? Mortgages to people who could not possibly service these mortgages. Why lend to such people? First of all institutions were encouraged to do so. The Community Reinvestment Act in the USA encouraged institutions to lend to the poor. In fact, if they didn't make enough loans to the poor the institution couldn't expand by opening new branches or through mergers and acquisitions. The act had a nice catch 22; on one hand the loans had to be based on sound financial principles but on the other they should be to people which sound financial principles would have disqualified from receiving loans. The second reason is that people made money extending these loans. From the commission to the agent who writes the loan to the payment to the institution reselling the loans as derivatives to commissions to agents selling these derivatives. Down the track there were those raking in the windfall, the estate agents, the builders, tradesmen and many more. Note however that this last group just benefitted from this highly irregular situation. They had no say in extending these loans.
How can a mortgage be an asset? First of all, a mortgage has real estate behind it. So its backing seems rock solid. Now imagine buying a mortgage for $220,000 from an institution who extended a $200,000 mortgage. Over the years you are going to rake in, let's say $350,000. Not bad for an investment backed by real estate. If the person whose mortgage you hold doesn't pay, you sell his house. Neat. However, if thousands upon thousands of these people default on their mortgages thousands of thousands properties come on the market. Of course, by this time institutions are wary of extending mortgage loans. The properties which sell, sell for much less than the mortgages on them, if they sell at all. This happens all over the place. At this time things go off the rails in a major way.
So, who should be held responsible? Beyond any question of a doubt those who packaged these worthless assets and resold them as high value assets. They knew what they were doing. This is not rocket science. The mortgage defaults were guaranteed to happen. As sure as night follows day the next thing would be an avalanche of properties coming on the market. These financiers knew that right from the beginning. They are criminals and should be behind bars.
The next group of people are those who created the circumstances that made this possible. Many of them are just your usual inept public servants, from two USA presidents on downwards. Many of these have admitted that they have made mistakes. To which degree should they be held accountable? At present it seems that nothing is going to happen to any of them. If criminal negligence can be shown maybe some of them should be held accountable. It's not my call.
Below is a list of 25 people more or less responsible for the crisis. This list comes from Time. Clicking on any of the names will open a new window to the Time website to that person's page. Below the list I will discuss why so few have ended up, or face ending up, in jail.
Time list of the Blameworthy
- Angelo Mozilo
- Phil Gramm
- Alan Greenspan
- Chris Cox
- American Consumers
- Hank Paulson
- Joe Cassano
- Ian McCarthy
- Frank Raines
- Kathleen Corbet
- Dick Fuld
- Marion and Herb Sandler
- Bill Clinton
- George W. Bush
- Stan O'Neal
- Wen Jiabao
- David Lereah
- John Devaney
- Bernie Madoff
- Lew Ranieri
- Burton Jablin
- Fred Goodwin
- Sandy Weill
- David Oddsson
- Jimmy Cayne
Why are so few of these people in jail or face going to jail? First of all, much of what they did is not illegal. Extending a bad loan is not illegal. It is only when this bad loan is sold as a safe, good investment that it becomes fraud. The people who sold these derivatives will say they were open and honest. The people who bought them will say something different. Ideally, the exact nature of the investment, including its risks, should be on paper. It is extremely doubtful the buyers were fully informed of the nature of the investment. Of course, they should have exercised due diligence. I wonder how many people were offered these investments but turned them down. On the count of misrepresentation and downright fraud many more should get their comeuppance.
The second reason is that many of these well heeled people are also well connected. Make no mistake, they will use their connections. But that should be able to get them only that far. You may know that the Saudi royals got Tony Blair to stop a BAE bribery investigation. So, connections and leverage can get one pretty far.
The, most likely, most important reason is expensive lawyers. The legal profession has always been willing to follow big money, be it big money from the mob or from crooked company bosses. Connie Francis once sang that she could be found "where the boys are." Lawyers can be found where the money is. And these fat cats made millions selling or buying worthless investments, often driving old, established businesses into the ground. Dick Fuld made nearly $500,000,000 as CEO driving the 158 year old Lehman Bros into bankruptcy. He sold a $13,000,000 home in Florida to his wife for $100. Now why would he do that? All these people will have expensive legal representation. And in many developed countries the verdict is not based on one's guilt, but on the quality of one's legal representation. Expect many true criminals to walk away scott free.
That's enough for now. Next time I'll tell you how all this can be prevented.
Till next time.
