By Purple Onyx from Eyes on Obama:
Events are forcing the McCain camp to do something they ’ve been avoiding for weeks, that is, talk about the issues. I don’t think we’re going to be hearing much about lipstick in the near term. I see no better evidence of McCain’s complete lack of grasp of how the economy works than his call for ending "greed, corruption and fraud" on Wall Street.
Events are forcing the McCain camp to do something they’ve been avoiding for weeks, that is, talk about the issues. I don’t think we’re going to be hearing much about lipstick in the near term. I see no better evidence of McCain’s complete lack of grasp of how the economy works than his call for ending "greed, corruption and fraud" on Wallstreet. First of all, Wallstreet was built on corruption, greed and fraud. It’s part of its charm. I can’t even imagine Wallstreet without it.
Corruption, greed and fraud account for about 10% of the problems in the market today. The other 90% of the problem is structural. It started more than a decade ago when the nature of the mortgage industry was changed forever. Back in the good old days, if you wanted a mortgage, you went to a bank and that bank loaned you the money. The bank kept some loans in its portfolio and sold the rest in the secondary market. At that time, the secondary market basically consisted of Fannie Mae and Freddie Mac along with a few other pseudo-government entities that purchased farm land and other hard to place risks.
Then two things happened. In the early 90’s under pressure from the federal government, Bank of America came up with new criteria for lending to minorities. It had been well settled since the 80’s that minorities, particularly blacks and Hispanics tended to have "weaker credit." Bank of America was attempting to merge with another bank and they were blocked by the federal government, due to their poor record of lending to minorities. They rolled out a plan to deal with the problem. The plan received a welcome reception from regulators. Other banks who were also looking to merge, noting the positive response Bank of America got for its efforts, adopted similar plans of their own.
It was around this time that another change happened. In 1994, home mortgages began to be "packaged" into securities and sold directly to Wallstreet. The default rate on mortgages historically was less than 2% with 98% of borrowers meeting their financial obligations. As a consequence "mortgage backed securities" as they were called, received the highest ratings from the rating agencies. Sub-prime mortgages, designed for borrowers with "weaker credit" histories, quickly became part of the mix. Securities firms would "package" higher rated prime loans with lower rated subprime loans and still manage to receive the highest rating. In theory at least, these subprime borrowers would fight as hard to keep their homes as everyone else.
The rating agencies had little, if any, idea of the ratio of prime to subprime loans in many of these "packaged" securities. Securities firms convinced the rating agencies that the risk was properly diversified. Certainly, greed played a huge role in the resulting shake out. But it’s hard to see how legislation would end it. These securities had only been around a short time. Rating agencies didn’t have much to go on. They made an educated guess that proved to be wrong.
One of the things to keep in mind is that while these subprime mortgages were originally designed to help minorities who wouldn’t otherwise qualify for a loan, by 2004, more than 60% of these loans were going to prime borrowers. Here again, you can see the corrupting influence of greed. But since no one’s doing sub-prime loans anymore, greed has long since moved on to greener pastures. Except, of course, for the short sellers and I don’t think John McCainis proposing we outlaw short selling. That would be heresy. A short sale is a bet that the value of a given security or sector of the market is going to decline. Those guys made a fortune yesterday.
Think of it this way. You max out your credit cards and then find out that you’ve been laid off. You’re getting an unemployment check, but that barely covers the mortgage. The credit card bills just keep piling up. The only thing that’s going to save you is if business picks up and you’re able to go back to work. That’s a structural problem.
Okay, so maybe the credit card companies took advantage of you and tacked on unwarranted fees and other charges. You’d have to be out of your mind not to call them on it. But it won’t change that you did in fact max out your credit cards. That’s the condition the financial sector of our economy is in now. They’ve maxed out the credit cards. John McCain deserves credit for calling attention to the excesses that always accompany such a condition. But that’s hardly a solution.
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