WhatFinger


Part I

What Caused America’s Economic Melt Down



The political season is upon us. Will it be any different than other elections that have brought us such a corrupt system? Will we have more political promises with no follow-through?

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What should we, as responsible voters, know? What questions should we be asking candidates? Even more important, what will their answers tell us about whether they expect to serve the people or be served by the people? First and foremost, we need to make a distinction between politicians and citizen legislators. For the first time in many years, Tea Party groups and other citizen organizations have motivated citizen legislators rather than professional politicians running for office. That’s good. It can be very good, but if citizen legislators don’t have a grasp of the problems it is very unlikely they will provide much in the way of solutions. Voters need to know facts related to the primary issues that concern Americans. Too often, candidates offer facts that can and should be disputed, but aren’t – because voters don’t understand the problems. One thing that interests me in candidate selection is how much candidates know about what went wrong with the American economy. If someone running for office doesn’t understand the basic problems, can we reasonably expect them to find solutions? What caused America’s economic melt-down? The following represents a combining of my views regarding credit with the April 10, 2010 testimony of William K. Black, Associate Professor of Economics and Law, University of Missouri, Kansas City, before the Committee on Financial Services, U.S. House of Representatives. Much of what William Black told Barney Frank and his Committee was suspected or known in the industry, but Black did the best job of tying it all together of anyone I’ve heard or read on this issue. Where sentences are quoted, W.K. Black is being quoted from his Congressional testimony. Regarding the real estate market, as early as 2003, bankers began using terms like “melt down” and “epidemic” and “crisis.” I wrote my first article warning of the dangers of Freddie Mac and Fannie Mae in 2003 and my second article in 2004. They appeared in my local print newspaper. Also in 2004, the FBI testified before Congress that an “epidemic” of mortgage fraud was possibly occurring. The dangers were known. The Bush Administration tried to make corrections but it was too little, too late – and an obstructionist Democrat-controlled Congress refused to cooperate. The mainstream media supported the obstruction.

Liar Loans, Freddie Mac and Fannie Mae

In 2005, a report documenting a large number of inflated home appraisals was released. As a banker, I cannot tell you how repulsive the concept of inflated loan collateral is. When unreliable collateral values securitize loans, the credit process freezes. Appraisers, the 2005 report says, were being intimidated. This was known. Yet, the SEC “(1) took no effective action against the securities firms it regulated that originated, sold, and purchased liar’s loan product and (2) no effective action against firms that failed to disclose (1) the acute risk of failure that comes from originating, selling, or purchasing liar’s loans or (2) the losses from making or purchasing liar’s loans.” Liar’s loans are defined as mortgages granted to home buyers who were asked what their income was, gave a reply, but borrower income was never verified. An unemployed person could say “$200,000 a year” and no one was the wiser because no one checked. Congress has supported beyond reason two government-sponsored entities called Fannie Mae and Freddie Mac, purportedly to make home ownership possible for people otherwise unable to share the American Dream. If what we’re being told is true, please explain why Fannie and Freddie have only increased home ownership by 4 percent over the past 30 years. By contrast, between 1991 and 2008 (17 years) in the Netherlands and Italy, home ownership increased by 12 percent.

Subprime mortgages, mortgage-backed securities, mortgage-backed derivatives

Freddie and Fannie sold subprime mortgages to brokerage companies like Lehman Brothers. What most people don’t know is that Lehman, through its subsidiaries Aurora, BNC Mortgage LLC and Finance America, was one of the ten largest mortgage companies in America. These subprime mortgage specialists “fed nearly all of their loans to Lehman, making it one of the largest issuers of mortgage-backed securities. In 2007, Lehman securitized more than $100-billion worth of residential mortgages.” What did Lehman do with those mortgages? You’ve heard of “mortgage-backed derivatives,” haven’t you? The Securities and Exchange Commission (SEC) was Lehman Brothers’ regulator. Black makes clear in his testimony that the SEC simply did not have the expertise to regulate anything other than a “disclosure” regime. In other words, it is one thing to regulate stocks and bonds, but a totally different ballgame to regulate mortgage loans being made by an outside third party and then used to create mortgage-backed derivatives to be sold as securities. It’s one thing to look at a corporate balance sheet and create spreadsheets to determine a corporation’s worth – the stock process. It’s another to know that a mortgage loan made in Denver, CO is a good loan – especially if the borrower’s income hasn’t been verified. Black points out that the SEC’s only hope was to form “an effective partnership with the Fed. The Fed had unique authority under the Home Ownership and Equity Protection Act of 1994 (HOEPA) to regulate all mortgage lenders and had unprecedented practical leverage during the crisis because of its ability to lend and convert investment banks to commercial bank holding companies.” In other words, the Federal Reserve could have put an end to the liar’s loans at any time using the power granted it under HOEPA. Black testifies that “The Valukas report reveals that the FRBNY staff at Lehman recognized that the SEC staff at Lehman’s offices was not capable of understanding the financial condition.” So, the Federal Reserve Bank of New York as presided over by then FRBNY President Timothy Geithner, our current Secretary of the Treasury, was aware of the problem and did nothing.

"Regulatory Reform” Bill: Congress wants to cover up the cover up

In my April 25, 2010 News With Views article, I explained the new “Regulatory Reform” Bill currently being reviewed by Congress (it was voted down the day after my article appeared, thank God – but they’re still working on it). This new legislation clearly gives more power to the Federal Reserve. Why would the Congress want to give more power to a non-government bureaucracy involved in covering up the problems created by liar’s/subprime mortgage loans and what would happen when the mortgage loan derivative bubble burst? The only reasonable answer is: Congress wants to cover up the cover up. As stated above, liar’s loans and other unqualified mortgages were morphed into products called “derivatives.” Investment bankers (not commercial bankers) pulled that trick. Some of the most qualified bankers in the world call derivatives financial weapons of mass destruction. The FBI warned Congress about the threat to our economy via the dangers of subprime mortgages in 2004 and wanted Freddie and Fannie more closely watched. Congress continued to support these two government-sponsored entities after the FBI report and even after they were fined by government regulatory agencies for misstating their profits. In other words, both Freddie and Fannie lied about their financial data. The Congressional response to the FBI, by the way, was to remove 500 analysts who were studying this problem and relocate them to another government agency. William Black clearly states: “…the Fed is dominated by neo-classical economists that have no theory of, experience with, or interest in the complex financial frauds that are the dominant cause of our recurring, intensifying financial crises. Bernanke appointed an economist, Patrick Parkinson, with no examination or supervision experience to head all Fed examination and supervision.” And President Obama believes the powers of the Federal Reserve’s regulatory authority should be expanded? Obama is not dumb. There must be some other reason.

Real estate market collapsed and property values plummeted: It all began at Lehman Brothers

When subprime mortgages began defaulting at record rates, the real estate market collapsed and property values plummeted. It all began at Lehman Brothers. As William Black states, Lehman “lumped fraudulent liar’s loans in with prime loans and called them all ‘prime.’ This is a disgrace and an attempt to deceive.” Personally, I call it reckless disregard for reasoned policy and regulatory procedure. I call it fraud. In short, America’s economic meltdown has been caused by greed, conflict of interest, unenforced regulations that were ignored while on the books, a reckless disregard of Congressional oversight, and complete disrespect for the American people. It was caused by politicians for politicians who are reactive rather than proactive and who wait for something bad to happen and then try to “fix” it. Congressional oversight demands of those doing the over-seeing that they look for what might happen and legislate to prevent it, not perform surgery after a bad financial appendix bursts. I happen to believe it was a planned failure, but the above is true whether I’m right or wrong about the intent. Does your Congressional candidate know this? Even more important, do those who represent you in Congress currently know this? If not, how can they fix it? One thing is certain. The regulatory reform legislation currently under consideration by Congress will do nothing – other than cover up a cover up.


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Marilyn Barnewall -- Bio and Archives

Marilyn Barnewall received her graduate degree in Banking from the University of Colorado Graduate School of Business in 1978. She created the first wealth creation (credit-driven) private bank in America in the 1970s. Prior to her 21-year banking career, she was a newspaper reporter, advertising copywriter, public relations director, magazine editor, assistant to the publisher, singer, dog trainer, and an insurance salesperson and manager.


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