The Great Mortgage Industry Heist

Each evening newscast brings the latest fall-out of the mortgage industry bubble; the credit failures on Wall Street, “sub-prime” as the word of the year in 2007, job losses in the financial and construction industry… the coverage is regularly the lead story. As local homes sit on the market for months and neighbors search for jobs, the crisis appears closer but not directly in our wallets.

The credit crisis triggered by the sub-prime lending caused the Fed to quickly reduce rates and inject huge amounts of cash into the banking system in an attempt to alleviate the financial liquidity issues. An increased money supply makes the cash a consumer holds worth less -- a classic definition of inflation. Reminiscent of Germany printing currency after World War I until a loaf of bread cost millions of deuchmarks. Overall the U.S. government action has led to increased inflation, a falling dollar, and spiraling commodity costs; all in support of bailing out an industry that created its own problems due to its insatiability for riches.

Of course, mortgage executives and Wall Street deal makers are not feeling any pain. Lax lending standards allowed everyone to profit at every level of the food chain. The entire mortgage industry was focused on greed rather than proper lending standards. This includes every level within the mortgage industry from the broker who placed homeowners into improper loans for increased fees to the Wall Street bank executives whose firms packaged up junk mortgage paper and painted lipstick on these CDO pigs as triple-A investments. No thought to proper risk control was given; the entire industry was driven by a voracious hunger for money.

Countrywide Financial Corp. chairman and chief executive officer Angelo Mozilo, former Merrill Lynch CEO E. Stanley O’Neal and Charles Prince, former chairman and CEO of Citigroup, have all been in front of Congress attempting to explain why their multi-hundred million compensation packages were justified while their companies went down the flusher. Certainly the Wall Street bonus machine felt little pain.

In the end, who is holding the bag? Many would state that it is the main street consumer. A number of people may not think that these events impact their pockets; however this is no longer true. Every time a consumer fills up their tank or goes to the local grocery store they are paying the price for the greed of the mortgage industry. Welcome to the Great Mortgage Industry Heist – the greed that placed money in the pockets of a few impacting everybody.

The credit crisis, triggered by the sub-prime fiasco, has driven an inflationary economy with prices for most necessities spiraling at nearly unprecedented rates. Not only are the prices increasing but the associated total taxes being paid on necessities is rising – regressively impacting those who can afford it the least.

Consumers dropping by their local grocery don’t only encounter rising prices for milk, bread, and other basics – as prices increase the total collected sales tax on the necessities rises. While from a county level the total sales tax collected may be offset by the drop in consumer spending on non-necessity items such as clothes, electronics and other items as consumers are more stressed --- the staples needed to live are in the increased collections column.

The situation is no different at the pump, as fuel costs increase the associated gas tax in many states rise, making the commute to work more expensive.

Rising inflation due to action by the government and its agencies can in itself be viewed as a tax on the entire population. Certainly there is an option to let these institutions fail instead of extending liquidity by printing money and lowering rates, but for some reason this is viewed as a worse alternative than effectively taxing the entire population for the greed-driven decisions of the financial industry. “Too Big to Fail” can regularly be seen in print as government decision makers defend their actions to bail out larger banks.

Is it simply a choice between a deflationary depression and an inflationary recession? Government policy can drive either alternative. Either allow the market to wash out the excesses without interference or continually bail-out institutions. A good case can be made that the Great Depression would have lasted a much shorter period of time if the government had allowed the financial markets to run their course.

The sub-prime bubble will act as the historical example of a greed-driven institutional credit balloon which overwhelmed banks and governments. The contagion to other credit markets will drive required systemic reforms in risk management while placing many Wall Street quantitative models into the historic dust bin.
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An excellent overview of the bursting of the Mortgage Bubble can be found at:
http://www.blownmortgage.com/files/presentation3-2008.pdf

The 75 page power-point presentation, put together by T2 Partners LCC, includes many graphs and provides first-rate set of fact & figures about the situation, and demonstrates why the implosion is still in the early innings.