Do you remember liar loans? Someone working at MacDonald’s would go into a bank and say “I want to buy a house. “ The loans officer would say, “Great. How much do you want?” No credit check. No questioning whether serving hamburgers and fries paid the kind of money that would let someone make the monthly payments on a hundred and fifty thousand dollar loan. Or a two hundred and fifty thousand dollar loan.
Why no credit check? Because the rules had been changed. You didn’t change them. I didn’t change them. The people at the banks and loan companies changed them. The loan managers were to get a commission and their boss was to get a commission and his boss was to get a commission. If you were a loans manager with ten loans officers, you could make a lot of money.
But let’s say that you were old fashioned, you worried about lending people money who obviously couldn’t pay back the loan so you went to the loans manager and said, “We can’t give this person a loan. He’s probably making minimum wage.”
“Don’t ask,” the manager would say. “Give him the loan. See if he wants more. If he can’t pay, it’s not our problem. We’re going to bundle loans together, lousy ones, okay ones, a few good ones, then we’re going to sell the package to someone who wants an income stream from the interest. Sure, a few mortgage holders will default but so what? House prices are moving up. Someone else will buy the mortgage.”
Let’s say you were a loans manager for a small operation. You had fifty million to lend out. In the past, you’d check and recheck the borrower’s credit history. You’d hold onto the mortgage and collect the interest and use it to pay staff, expenses and depositors. After all, it was the depositors’ money you were lending out. But, now that you could bundle the mortgages together and sell the bundle, if you rolled the money over ten times during the year, you could lend out 500,000,000. And you could collect commissions on ten times as many mortgages. Nifty.
Except that in the contract fine print, it said that if things went wrong, you had to take back the bundled loans. Since you only had 50 million in capital and you’d loaned out 500 million, you couldn’t do it.
It came to a bad end because someone figured out that the bundles were crap. The default rate had been based on mortgages that were given to people who could afford them. Not only that but pretty quick, those bundles also included credit card debt, automobile loans, just about anything you can think of. Everybody collecting commissions was making so much money moving product, you know, like moving TV sets or computers through the door, that no one bothered to pay attention to the product. Those bundles got sold to the 99%, particularly to people who were retiring and who needed to replace their wages with interest payments. “Just like buying a bond,” they were told.
The people selling them that were as full of crap as the product.
That’s what happens when businesses are left to regulate themselves. Chinese exporters have been known to put toxic chemicals like melamine into food because it made a poor quality product look like a good product. American bankers and financiers aren’t any better. They created and sold a product that was so toxic that the American government has had to intervene to keep interest rates absurdly low. It has had to provide vast sums of money to backstop toxic mortgages. The product was so toxic that it could still destroy the political and economic system of the United States.
The 99% didn’t create these toxic mortgages. The 99% didn’t create a system of commissions that would reward a few through irresponsible loans. Previously, the system had always worked because the duty of the lenders had been to the stockholders and depositors. Once a commission system with the ability to sell off mortgage and loan contracts was in place, the only duty was to the people collecting the commissions.
Let’s not revise history, as some apologists for the 1% are trying to do. The 99% may have been suckered by TV ads, newspaper ads, posters, letters in the mail that said they could afford to buy the house of their dreams but they didn’t create the irresponsible system. Nor did they reap the rewards. It wasn’t the depositors who loaned out the money. Always follow the money. That way you know who is running the scam.
Check out Iceland. It was the canary in the coal mine. Who created the crises there? Look back at Japan. Who wrecked their economy? Europe is a slow motion train wreck that may still manage to destroy the future of the 99% in the rest of the world.
Since commissions and bonuses are supposed to be for exceptional performance and since what we’ve got is disaster, maybe it’s time that all those commissions and bonuses that were taken on false pretenses should be taken back.