God, Assumptions, and The Financial Crisis
Sometimes I think of a definition of God as irony. When mortal human beings have the unmitigated temerity to assume, sometimes God steps in with irony. And the assumptions were and are many.
The current assumption of the financial pundits begging the public to support this bailout, is that the public cares. One interesting call came on the local news affiliate from someone who makes minimum wage. He has no $250,000, or $100,000 to protect. He doesn’t have any 401K or IRA investments. He is living from paycheck to paycheck. His question, why should I care?
The assumptions that were made in the boardrooms, was that risk was someone else’s problem. I spent years in two different boardrooms of financial firms. One in the mid 1990s, where we were urged by the CEO to, “get that man elected”. That man was a Republican candidate running for governor, who was favorable to our interests. The second boardroom was for a mortgage banker, where I was heckled by the COO as Kerry gave his speech. I don’t think it was my silence that was a dead give a way regarding my political leanings, but my adversity to risk.
What were the risks? The mortgage bank I worked for was one of the first companies in the country to use automated underwriting. Before computers and computerized credit scores, human beings underwrote files. Over about a ten year span we progressed from mailing to faxing, copying to scanning, and ultimately trusting the wisdom of a computer.
The first loan I used automated underwriting on was for a man making $8.50 an hour, or $1,462 a month before taxes, health insurance,utilities, gas, etc.. I was asked by the Realtor and his mother, a branch manager at a credit union, to keep running his loan through Freddie Mac’s automated system for the highest loan amount. For the $85,000 home, his payment with taxes and insurance came to $650 a month, or nearly 45% debt to income ratio before taxes, etc.. Using a conservative optimistic estimate, lets say 15% of his check went to taxes and his health insurance was covered, that leaves $1,242.70. After paying the mortgage payment of $650,that leaves $592.70 a month. Lets say he spends $200 a month on food and $200 a month on transportation to work, that leaves $192.70 for electric, heat, water, and trash service. Some would say he shouldn’t have bought a house, but can you see renting most places for less than $650 a month? Can you imagine raising a family? Can you understand why common people may not care about bailing out people who have more than they do?
Later the automated systems of Freddie and Fannie began taking higher debt to incomes, particularly if the person made a large income. The systems also asked for less documentation, “streamlining” the process. The assumption was that good credit scores and the residual income relative to the mortgage payment and cash reserves was sufficient to mitigate the risks. But the production would slow as interest rates went ever so slightly up. So how does one maintain the production levels and the executive bonuses associated with bringing in more production? Push the envelope.
Eventually there would be those with debt to income ratios that went above 50%, 60%. So to get more production the Stated Income Verified Asset, Stated Income Stated Asset,and the No Income No Asset became into play and not only for “sub-prime”companies, but for the GSEs as well. One assumption was that the borrower had a business, which had tax write offs that reflected poorly on their “real” income. The other assumption was that because of the credit score, the borrower could be trusted to figure out how to make the payment.
But production is down again and we’ve cooked the books,changing accounting guidelines to make things look better, (something the Republicans are suggesting now). We need our bonuses, so what to do? Well lets give the borrower who we don’t know if they have an income the “Option” to make a small payment that is essentially borrowing against their home. These Option Arms were particularly popular with Jumbo loans, those loans that went over Fannie, Freddie, and Federal Housing Administration (FHA)loan limits. The assumption was that housing prices would keep going up.
My incorrect assumption was that my bosses wanted to hear about risk. There were many risks, but the last risk was doing business with Bear Stearns and Lehman. They pushed the envelope just a little further on the No Income No Asset. Now the credit scores were lower, the loan to values were higher, and the types of properties included investment homes. The joke was that we might as well take homeless people off the streets and give them a loan. But despite the jokes and reservations, they wanted the production volume.
Now we are in the final assumption. The assumption that corporations will operate in the best interest of the public and save us money over government run institutions like FHA. The assumption that the pharmaceutical industrial complex, the healthcare industrial complex, the military industrial complex, the energy industrial complex will look out for our best interests versus their wallets. Whether it was the General Accounting Office having to drop the suit against energy influence and Cheney after the Republicans gained control of both houses of Congress, or a Bush creating a loophole that put many at risk of loosing prescription drug coverage for the windfall profits to pharmaceutical companies, or how $12 billion in one hundred dollar bills was shipped to contractors like Halliburton, Blackwater, and KBR,who like to build showers that electrocute our troops, or the Savings and Loan crisis, or today, it is all corporate welfare. Corporate Welfare supported by lobby blood money and communist China. The Golden Calf is worshiped at the expense of the American people.
The irony is that the religious have been led down the road to perdition. And now there is confusion with all the lies they have been told, the assumption that government is evil and capitalism, privatization is the savior. To reconcile the reality that communist China’s Yu Yongding, can tell us, “If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately,….`If it is not the end of the world, it is the end of the current international financial system.” Communists who have persecuted religions are now telling us what to do. And the religious have sold the soul of the United States of America for promises of what? A reduction in abortions and gay marriage? No. The opportunity to worship the Golden Calf. I love irony.