Monday, April 27, 2009

Breaking Down the Subprime Mess

The start of this problem began many years ago with what I am sure are many, many Ponzi schemes, such as one that occurred in Alabama and involved a man named Jordan Olshan. The links provided give you the basics of the scheme. The mortgage company (and I say that loosely) did in house appraisals, using their own puppet appraisal division. Of course, all the appraisals were inflated like George Bush’s ego after his second election. This served two purposes. One, it allowed the company to hide its true value behind inflated books, and it allowed sales of homes at an over-inflated price to the poor folks that didn’t know any better or had no other option but to use this company for their financing. A number of the homes were owned by the company and were sold, foreclosed, repossessed, sold, foreclosed, and repossessed over the years that this scheme unfolded. In effect, the company became a “You Tote the Note” lot for houses. Their customers were generally undereducated, the elderly, and minorities. Easy prey and the principals were able to take sizable profits for many years. The investors were satisfied for a period of time also because they were getting return on their money, 16 ½ percent sure beats the amounts paid by CDs.

The relief, such as it was, that was awarded through the Court system went to the investors, not to the unfortunate Joes who were slaves at 18.5 percent interest to these snakes. I have a hard time mustering a lot of sympathy for the investors. You can’t tell me that they didn’t know what kind of an operation they were invested in. When you lie with snakes, sooner or later you better count on getting bitten.

Back when, there were a number of court cases prosecuted on behalf of the borrowers, but the Court system in its wisdom decided that if you could read (whether or not you understood, or whether or not the terms were usurious, or whether or not there was bad faith and misrepresentation), if you could read your name, then you were deemed to have understood the contract. Did I mention that these decisions were handed down by right wing, conservative Republican Judges? Anyone who thinks that the local Court systems are fair and impartial, and make decisions based on equity needs to wake up and smell the coffee. But that is another story.

The local Courts continued to allow this type of company to operate and I’m sure they were and are in every City and every State in these 50. When you multiply all these little operations, (Notice the word “little”, the monies involved in this one scam was in excess of $53 million.) you start to get the picture of just how widespread this was. Remember who likes to protect the interests of investors. You know ‘em, you love ‘em, they are going to keep your taxes low (if you earn at least $250,000.00 a year, that is), they are going to represent your family values and keep you safe, you put them in office.

Of course, this is an over simplified start to a much longer explanation, you have to take these sub-prime mortgages, put together by slum lords, package them up, call them mortgage backed securities or other equally attractive sounding names, sell them though reputable companies to everyone in the free world that wants to make a profit, whether or not they know what they are investing in, and then wait for the inevitable “other” shoe to drop. Did you hear the thud?

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