http://www.economist.com/blogs/democracyinamerica/2010/08/inequality_and_crash_1?page=1
On Wall Street, where many of these loans were packaged into securities and sold
to investors around the globe, a new term was coined: IBGYBG, “I’ll be gone, you’ll
be gone.” It referred to deals that brought in big fees up front while risking much
larger losses in the future. And, for a long time, IBGYBG worked at every level.
Most home loans entered the pipeline soon after borrowers signed the documents (p. 36)
“Securitization was one of the most brilliant financial innovations of the 20th century,”
Rokakis told the Commission. “It freed up a lot of capital. If it had been done
responsibly, it would have been a wondrous thing because nothing is more stable,
there’s nothing safer, than the American mortgage market. . . . It worked for years.
But then people realized they could scam it.” (p.38)
Years later, Fed Chairman Greenspan described the argument for deregulation:
“Those of us who support market capitalism in its more competitive forms might argue
that unfettered markets create a degree of wealth that fosters a more civilized existence.
I have always found that insight compelling.” (p. 61)
Testifying before Congress in 1997, he framed the issue this way: financial “modernization”
was needed to “remove outdated restrictions that serve no useful purpose,
that decrease economic efficiency, and that . . . limit choices and options for the consumer
of financial services.” Removing the barriers “would permit banking organizations
to compete more effectively in their natural markets. The result would be a
more efficient financial system providing better services to the public.” (p.62)
During a hearing on the rescue of Continental Illinois, Comptroller of the Currency
C. Todd Conover stated that federal regulators would not allow the largest
“money center banks” to fail. This was a new regulatory principle, and within moments
it had a catchy name. Representative Stewart McKinney of Connecticut responded,
“We have a new kind of bank. It is called ‘too big to fail’—TBTF—and it is a
wonderful bank.”
In 2004, commercial banks, thrifts, and investment banks caught up with Fannie
Mae and Freddie Mac in securitizing home loans. By 2005, they had taken the lead.
The two government-sponsored enterprises maintained their monopoly on securitizing
prime mortgages below their loan limits, but the wave of home refinancing by
prime borrowers spurred by very low, steady interest rates petered out. Meanwhile,
Wall Street focused on the higher-yield loans that the GSEs could not purchase and
securitize—loans too large, called jumbo loans, and nonprime loans that didn’t meet
the GSEs’ standards. The nonprime loans soon became the biggest part of the market—“
subprime” loans for borrowers with weak credit and “Alt-A” loans, with characteristics
riskier than prime loans, to borrowers with strong credit.
By 2005 and 2006, Wall Street was securitizing one-third more loans than Fannie
and Freddie. In just two years, private-label mortgage-backed securities had grown
more than 30%, reaching 1.5 trillion in 2006; 75% were subprime or Alt-A. (p. 130)
Fannie Mae and Freddie Mac’s market share shrank from 57%
of all mortgages purchased in 2003 to 42% in2004 , and down to 37% by 2006. Taking their place were private-label securitizations—meaning those not issued and
guaranteed by the GSEs. (p. 105)
“The definition of a good loan changed from ‘one that pays’ to ‘one that could be
sold,’” Patricia Lindsay, formerly a fraud specialist at New Century, told the FCIC. (p. 132)
David Berenbaum from the National Community Reinvestment
Coalition testified to Congress in the summer of 2007: “The industry has
flooded the market with exotic mortgage lending such as 2/28 and 3/27 ARMs. These
exotic subprime mortgages overwhelm borrowers when interest rates shoot up after
an introductory time period.” To their critics, they were simply a way for lenders to
strip equity from low-income borrowers. The loans came with big fees that got rolled
into the mortgage, increasing the chances that the mortgage could be larger than the
home’s value at the reset date. If the borrower could not refinance, the lender would
foreclose—and then own the home in a rising real estate market. (134)
At the hearing, consumers testified to being sold option ARM loans in their primary
non-English language, only to be pressured to sign English-only documents with significantly
worse terms. Some consumers testified to being unable to make even their
initial payments because they had been lied to so completely by their brokers.”
Mona Tawatao, a regional counsel with Legal Services of Northern California, described
the borrowers she was assisting as “people who got steered or defrauded into
entering option ARMs with teaser rates or pick-a-pay loans forcing them to pay
into—pay loans that they could never pay off. Prevalent among these clients are
seniors, people of color, people with disabilities, and limited English speakers and
seniors who are African American and Latino.”136
The New York Fed, in a
“lessons-learned” analysis after the crisis, pointed to the mistaken belief that “markets
will always self-correct.” “A deference to the self-correcting property of markets inhibited
supervisors from imposing prescriptive views on banks,” the report concluded. (198)
In that special examination, OFHEO pinned many of the GSEs’ problems on their
corporate cultures. Its May 2006 special examination report on Fannie Mae detailed the
“arrogant and unethical corporate culture where Fannie Mae employees manipulated
accounting and earnings to trigger bonuses for senior executives from to .”
