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Financial Conglomerates Created this Crisis: We Are Paying For It.

Financial conglomerates often say that they didn’t see this financial crisis coming.  That is hard to believe.  They worked very hard in Washington to push for de-regulation of the banking industry and they succeeded.  They practically were giving money away to people who could not afford the loans they were given.  They knew that their downside risk - risk of failure was protected by credit default swaps and taxpayer money.  They knew this was coming but they didn’t care because they were profiting tremendously from subprime lending.  There was an investigative report released today by the Center for Public Integrity that shows the extent of the financial conglomerates’ involvement in this crisis.

Back in 2000, I was working with not-for-profit community organizations to combat the spread of predatory home lending that was devastating neighborhoods in Chicago, Illinois.  We often spook to Illinois state legislators about the problems with predatory home lending and the need for better laws and regulations.  We were often ignored.  It wasn’t until several years later that I discovered that lobbyists for the mortgage industry and banking industry were showering Springfield, Illinois with dollars to persuade/buy legislators from passing tougher laws that would have curbed the spread of predatory home lending. 

At the time, predatory home lenders were focusing on home equity loans.  They were targeting senior citizens and people asset-rich (home equity) but cash poor.  Some mortgage brokers/lenders would target whole city blocks - going door to door.  They would promise easy and quick money for needed home repairs like new gutters, to pay off unsecured credit card debt, or even vacations.  The abusive practices that they employed were incredible: deceptive marketing, lending regardless of borrower’s ability to repay - solely based on equity, incomplete loan disclosure and fraud, excessive loan fees (15-20%) that were added to loan balance, financed credit insurance (often included without disclosure), balloon payments, loan “flipping” (frequent refinances), negative amortization and prepayment penalties.

We were not able to stop the predatory lenders.  I failed to realize how much money and power they had backing them.  As money became more cheap, with the help of low interest rates, these predatory lenders moved on to finance home purchases using the same predatory practices they used in with home-equity loans. 

Today, financial conglomerates are trying to play the divide and conquer game.  They figure if they can demonize the borrowers - the people that were preyed upon - and label them as irresponsible that the public would turn against these people and policy makers would be less likely to help struggling homeowners.  Financial conglomerates have succeeded in this regard.

I often suggest to people who are so against helping struggling homeowners to step back and try to understand what those people were experiencing at the time they entered into these troubled mortgages.  We had the “American Dream” of owning a home being pushed and marketed like never before from the home builders, realtors, mortgage and banking industry and even President Bush.  Advertisements were saying own a part of that “American Dream” regardless of credit history - affordable loans for all.  “Mortgage experts” were telling people don’t worry they will make the loan payments affordable.  The power of the marketing of the “American Dream” and persuasion by “mortgage experts” was too much for many people and they signed up for one of these troubled mortgages.  We know what happened next.

The Center of Public Integrity has released a study that shows that

The top subprime lenders whose loans are largely blamed for triggering the global economic meltdown were owned or backed by giant banks now collecting billions of dollars in bailout money — including several that have paid huge fines to settle predatory lending charges. The banks that funded the subprime industry were not victims of an unforeseen financial collapse, as they have sometimes portrayed themselves, but enablers that bankrolled the type of lending threatening the financial system.

That is right the financial conglomerates provided the money to these predatory lenders.  We used to distinguish between subprime lenders and predatory lenders back in the day because it was believed that subprime lenders were providing much needed capital to low-income communities.  This distinction is no longer applicable because both lenders used similar practices to obtain business mainly lending regardless of a person’s ability to repay the loan.

The financial conglomerates were making a ton of money and they didn’t want to stop this money train. 

U.S. and European banks poured huge sums into the subprime lending market due to unceasing demand for high-yield, high-risk bonds backed by home mortgages. The banks — including household names like Lehman Brothers, Merrill Lynch, Citigroup, Credit Suisse First Boston, and Goldman Sachs & Co — made huge profits while their executives collected handsome bonuses until the bottom fell out of the real estate market.

The frustrating point is that we will still demonize people who fell for the marketing schemes and financial manipulation by the financial conglomerates and not truly help them.  But we will not stop bailing out the financial conglomerates that caused this crisis.  We, the people, have lost trillions of dollars in home equity, retirement savings and tax dollars all because of financial conglomerates and not because of “irresponsible, free-loading people”.

What’s missing from this story is the fact that this was a self-inflicted wound for which the rest of us are picking up a massive tab. The largest American and European banks and investment houses were not the unwitting “victims” of an unforeseen financial collapse, as they have so often been portrayed. The mega-banks not only invested in subprime lending institutions — they were the enablers, bankrollers, and instigators driving high-interest lending, and they did so because it was so lucrative and unregulated.

These financial conglomerates knew what they were doing with these risky loans but they didn’t care because their downside - there risk of loss - was protected.

Did these major financial institutions not understand what kind of lending was taking place? The poor quality of these loans was no secret. Many of these subprime lenders, the Center found, were forced to pay billions of dollars to settle government charges of abusive or predatory lending practices. This was a period of some of the worst mortgage lending in American history, in which regulators were nowhere to be seen, and normal income documentation and loan standards were thrown out the window. In many cases, though, the big banks really didn’t care if the loans were bad. That’s because they’d bought “insurance” against them — those infamous “credit default swaps.” The swaps sounded good, except they were unregulated, and those selling them — like American International Group Inc. — didn’t have to maintain reserves to guard against unforeseen losses.

The financial conglomerates also knew that the government would not let them fail. 

I strongly encourage people to read this very informative investigative report.