Blame the System

I'm getting tired of the Wall Street boys and their financial media pals blaming the poorest homeowners for the economic mess we're in. Those nasty subprime borrowers, the financial class bellows, how could they have done this to us? While the catalyst for our present debacle may have been housing loans, they in no way were the cause.

The free marketers on CNBC and Fox cite personal failures, but somehow the failures are of the poor and middle class, not on them and the plutocrats they nosh with in Manhattan. Somehow their promotion of the zeitgeist of personal greed escapes scrutiny. Just watch two hours of CNBC in the morning. It's like some kind of parallel reality, where a blame-the-victim ideology runs rampant. What happened to the mantra of personal responsibility that the elite tells us need to guide our actions?

The credit and housing crisis is sure to be especially rough on the Bay Area. The facts are startling and the ramifications will be fast and furious. Recent Chronicle stories reported that in August more than 50 percent of Californians who were able to sell their homes sold them for less than the amount they paid, the highest number ever. In the same month, 36.1 percent of the sales in the Bay Area were foreclosures, according to MDA DataQuick, a San Diego research firm. Homeowners in the East Bay have been especially hard hit. In Contra Costa County more than half of the 1,339 homes that changed hands were foreclosures. Even worse, Contra Costa County resale volume was up 69.9 percent compared with August 2007, meaning that people are losing their homes at an awful rate. Meanwhile, the resale median price in the county, the Chron reported, plunged 48.4 percent to $315,000 from $610,000 a year ago.

Folks who took out home loans that were, and are, difficult to repay have been trapped in the web of the hubris which reigns in America today. An underregulated industry was able to flourish that specialized in telling people that they qualified for the home of their dreams, even if they did not. Relying on the audacity of hope and, backed by a Ponzi-scheme financing industry, claims were made to many who bought homes they are now losing. Who among us, in our search for the American Dream, is strong enough to reject the blandishments of these mortgage "experts" at Countrywide/Bank of America?

The current Wall Street Welfare Bailout plan is being pegged at a cost of $700 billion. Were the East Bay's "conniving" subprime borrowers responsible for this because they believed the sweet talk of the mortgage loan officer, who believed the sweet talk of the mortgage syndicator, who believed the sweet talk of the mortgage securitizer, who believed the sweet talk of the plutocrats at the bond firm? It's because the Bushites, and Clinton's Rubinomics, allowed a basically unregulated system to flourish in which a few could garner Croesus-like wealth. Greed is good, remember? That is the fundamental cause of our calamity.

How did this really happen? At its core it was not the avarice or stupidity of those working-class subprime borrowers; it was greed through the mechanism of "securitization." An industry of "securitizers" has grown thanks to the gurus of no regulation. This process has been called financial alchemy, but that's giving alchemy a bad name. It was financial fakery.

Think about layer cakes and chessboards. I happen to love chocolate cakes, like the ones my mom made out of the Duncan Hines box. Try this, make a cake. Each layer is like a loan given to an East Bay homeowner. A securitization packager would pile a bunch of loans on top of each other for a cake. Now, cut your cake into slices. Each slice would have a part of several loans. This slice would get sold to a money market fund, or pension fund, or you could buy them yourself at Charles Schwab. The sales narrative when these slices were peddled was that they were risk reducers. If one borrower could not pay back her loan, the purchaser of the bond would not be out much since there were a number of other, healthy borrowers who still had loans in your slice.

The real genius of this arrangement, however, was that this industry was able to set up a long food chain which made money every time one of these cakes was baked and a slice sold. In the "old" days, the maxim about banking was that it was not enough to just touch the money. That is, while banks and their employees handled a lot of money, little of it went to them personally. Those in this industry, however, got to take a few good-sized crumbs for each person in the chain. And to paraphrase Everett Dirksen, a few crumbs here and a few crumbs there and pretty soon you have some real money.

But this was not enough for these smartest guys in the room. They could do even more. Let's say another securitizer was making a lemon cake out of home equity loans from homeowners in Georgia. A specialized packager would put our two cakes together. So, they would take a slice of the first cake and put it on top of a slice from the second cake, and sell the slices from this new cake. Again, the theory was based on their flawed viewed of risk, blinding them to the Rube Goldberg-like nature of the new cake. So the game continued. In this modern financial kitchen the possibilities were endless. Pretty soon you had a multilayered, multicolored cake whose slices looked like a chessboard — many little pieces. But people actually lost track of what was in each piece. And the people who had made money on each transaction were long gone, in a legal sense at least.

Now no one outside of government will buy these bonds. No one wants to eat a piece of cake that has so many little pieces in them when it is so hard to figure out what they are. And, along the way, little pieces turned rotten, as people were unable to pay the mortgages they had been sold. If no one wants to buy something, what is it worth? So, the system froze up.

Quit blaming the victims who are losing their homes. We all intuitively know that if someone puts something in front of us that we really want, tells us that we can get it and that everyone is doing it, we are going to do it. But that's different than setting up a system that can have these types of consequences, prancing off with the profit, and then telling us it's our fault when things go bad.