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Sunday, November 21, 2010

Predators Along Life's Highway - Part 1

What do Bernie Madoff and the sub-prime lenders have in common? They both perpetrated the largest securities fraud in their respective industries in U.S. history: Madoff swindled more investment capital than any fiduciary ever, and the mortgage companies nearly brought down the entire global economy with the sub-prime lending scheme. Though the two frauds were similar, the government’s response was vastly different: Madoff was sentenced to prison with a scheduled release date of November 14, 2139. If you’re keeping track of the math, that’s 130 years of a 150 year sentence. However, instead of prosecuting those in the banking industry who brought the world’s economy to a screeching halt as it teetered over the precipice of oblivion, the banking system received a massive injection of Federal funds. This bailout, the Troubled Asset Relief Program (TARP), was established under President George W. Bush, and was given in lieu of any jail terms.

TARP obligated the tax payers to purchase or insure $700 billion of “troubled assets,” mostly related to the sub-prime lending fraud. So in other words, unlike in the Madoff case, the perpetrators of the mortgage fraud got bailed out, while many of the homeowners who took advantage of these sub-prime loans were left drowning in a sea of debt. The term “underwater” directly relates to homeowners whose houses are now worth less than the amount that is owed on them.

While housing prices were rising precipitously during the early 2000s, homeowners came to expect 10-20 percent annual gains on the value of their homes. And as home values continued their steep appreciation, with no signs of a correction, the lending institutions used this fool’s gold to entice borrowers whose credit worthiness would have never qualified them for a mortgage under any reasonable lending guidelines. Although many pundits have blamed the homeowner for borrowing money they could not afford to repay, I would argue that the fault doesn’t lie with the homeowner, but the lending institutions.

It is no stretch to compare the recipients of these sub-prime loans with a 15 year old girl who is being pursued romantically by a 40-something year old man, who has all the trappings of wealth – expensive cars, large home, vacation villa, custom threads, international travel, an investment portfolio, and rubbing shoulders with world famous celebrities. Not many girls can resist being captured by one of the traps that have been set. In most states, if this man snares the 15 year-old girl and engages in sexual relations with her, it is considered rape; notwithstanding if the relationship was consensual or not, because society has determined that a 15 year old girl is not expected to be emotionally mature enough to resist such an allure.

Home ownership is the American dream; however, it was unattainable for many until that 40-something year old man came by flashing his no-interest, no paperwork mortgages during a time when home values were on a steady increase. Although we now see the consequences of what happened to those who received sub-prime loans, every bad risk borrower didn’t end up underwater. Some were astute enough and others were lucky enough to buy a home at the beginning of the real estate boom; sell it a few years later and realized a couple hundred thousand dollars windfall, and then they put that money down on a more reasonable home purchase. God Bless them; however, not everyone was so fortunate.

Who is to blame for the mess? I hear back-alley pundits throwing around words like, “stupid,” “dumb,” “foolish,” and “ridiculous,” referring to borrowers for purchasing homes that they could not afford. Sure, in a perfect financial world, where the lending guidelines are being strictly adhered to, most of those sub-prime loans would not have been made, and the economy would not have collapsed as a result of “predatory” lending practices. However, with the prospect of home ownership during an era of unprecedented rise in home values, was that 15 year old girl mature enough to remain in that low-rent, crime ridden apartment complex when that 40-something year old man was literally giving mortgages away?

In hindsight, we now see that this young girl was swept off her feet by her gluttonous pursuer; yet, instead of rescuing her from her assailant, the U.S. government defended the attacker and insulated him from his own destruction…to the tune of $700 billion. This, we were told by the Secretary of the Treasury at the time, Henry Paulson, was necessary to prevent a global economic collapse.


To state the obvious; “This was very serious.” It was infinitely more serious than Madoff’s ponzi scheme; and I am certainly not mitigating the gravity of his crimes. However, if we are to believe Paulson’s justification for a tax payer bailout of the banking system, then where are the Federal prosecutors who should be investigating the illicit, and possibly illegal, sub-prime lending practices? Oh, that’s right! They were busy chasing Wesley Snipes.

to be continued…


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