If memory serves, Ben Stein, who appears to be a semi-Renaissance man, in that he is mediocre in a number of professions, opined that the credit crisis was no crisis at all. (I can’t find a link, as I write this the Times search server tells me that it is temporarily unavailable. In today’s Times he appears to recognize that we have a problem, but points out that there’s a silver lining: if so many people lost big money on these deals, it stands to reason that someone made money off those suckers, so in a way it all evens out. At least that appears to be what he’s saying.
Someone sold these debt instruments to these huge banks and investment banks. The someone might have been a borrower who was not qualified, or another player in the financial field like a hedge fund or a mortgage originator.
…There are gainers somewhere, and it sure looks as if some home borrowers are in that group. Obviously, with hindsight, we can see that the lenders’ risk premium in fees and interest rates should have been even higher than it was.
I’m not a lawyer, writer, actor and economist, but I don’t need to be all those things to see that there’s something not quite right here. Stein appears to be saying that the borrowers made out like bandits because they were such poor risks that they should have paid even more for the loans in both interest rates and up front fees than they did. They got those mortgages cheap friends, and the fact that they bought a one way ticket to financial ruin is, apparently, totally beside the point. The borrowers are the only group of people that he specifically singles out as having profited from this mess, although he does, at least recognize that the banks may have bought the securities from someone else.
I’ll grant him that there were probably a lot of borrowers that should not have gotten loans, but it is a stretch to say that the typical subprime borrower has somehow bilked the banks who bought the securities peddled by the middlemen who got those borrowers to pay large upfront costs to get mortgages at high interest rates on which they were doomed to default on homes that would likely fall in value thus leaving them with nothing but foreclosed homes and a mountain of debt. They are not ahead of the game.
There are, of course, lots of people who are very much ahead of the game, including folks like Angelo Mosilo, http://www.nytimes.com/2007/11/11/business/11angelo.html?ref=business&pagewanted=print who Stein can read about in the very issue of the Times in which he suggests that it is mostly borrowers who soaked all that money from the banks. It was the folks who conned both borrowers and bankers who made all the money. They made real money, not hypothetical gains on real estate that was sure to keep rising in value, except for the unfortunate fact that it was impossible for that to happen. The corporations for which they worked may now be bankrupt, but the millions they took away while the con was running well have now, for the most part, been safely parked elsewhere, and it was all somewhat perfectly legal. In Mosilo’s case, Countrywide is still around, and he appears to believe he can save it, but he took almost $500 million out of it in the past few years, and he was selling stock big time in the months before it tanked. No matter what happens to Countrywide, he’ll be able to keep buying gold Rolls Royces.
Stein is a Republican, so he must be forgiven for his inability to see the obvious. Only a Republican could claim that the borrowers have gained from the subprime mess at the expense of the banks, while all but ignoring the folks who created and profited from this debacle, people who walked away with millions in cold, hard cash.
By the way, I recognize that it would not be impossible to get anecdotal evidence of borrowers who actually did well with a subprime mortgage. There are exceptions to every rule. Stein implies, without outright saying, that the exceptions are the rule.
Putting aside all that, how is it the case that a loss on one side implies a correlative gain on the other, at least as far as the borrowers and the holders of the securities are concerned? The securities are of little value because it is now clear that the real property that was security for that debt is not worth what everyone “thought” it was worth. The bank’s securities have decreased in value because the borrower’s real estate has decreased in value. Both sides are losers. It’s true that the borrowers got cash to buy those houses, but that cash went to the seller, and the borrowers can’t get it back unless and until home prices recover before they lose everything to foreclosure or bankruptcy. The winners in that picture (again, ignoring the middlemen) are the sellers of the houses, not the buyers, because the money went to them, and they get to keep it.
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