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elfsMichael W. Hudson's book The Monster has left me scared and paranoid. Every time the phone rings and I don't recognize the phone number, I start to sweat profusely. Is it... one of them?
Unfortunately, Hudson's book isn't a Stephen King (or even Stephen Coontz) work of fiction. It is horror, but it's not fiction. It's an investigation into the way mortgage-backed securitization, the mainstreaming of home equity lending, and a look-the-other-way regulatory regime, all combined into a perfect shit storm to wreck the American economy and destroy the middle class.
While the book concentrates on a few characters, the centerpiece being the late Roland Arnall, CEO of Ameriquest, its real villain is the root of all evil, money. In their quest for it, Ameriquest, First American Mortgage, and other mortgage brokers first reframed the once disreputable second mortgage, something you only took out if you were in desperate and dire straits, into the pleasant-seeming and even fair "home equity loan" or "home equity line of credit."
Although, as JP Morgan now admits, not only did incomes not grow during the Bush administration, but corporate accounts grew only because wages and benefits for the middle class were squeezed, we still bought cars and houses. How? With those equity lines of credit. With money we didn't have.
The Monster shows that not only was America's growth during the Bush Administration illusory, it was fraudulent. While salesmen with thousands of calls sold to people barely familiar with their first mortgage, much less their second, they were also doctoring the images, timing meetings to make sure customers were ill-prepared and time-pressured to just sign it all without reading it, and sometimes aggressively pressuring people to just sign. Back at "the lab," (a nickname some Ameriquest offices had for the office's copy room, where Wite-Out and scissors were used to creative effect), the loan paperwork would be doctored to reflect higher percentage rates, balloon fees, and other nightmares. Sometimes signers were given huge stacks to sign, not knowing that they were signing two mortgages, one of which was to be thrown out.
The entire disaster was a Ponzi scheme in which securitization (the conversion of bundles of mortgages into market-tradeable entities) fed huge funds into the system, and then groaning mortgages and other debts extracted huge funds from the wallets of ordinary citizens. When the music stopped, there were a lot of chairs missing, and a lot of people fell down. The current wave of foreclosures is not just because people lost their jobs in the disaster; it's because they lost their jobs after 10 million of them mistakenly bought mortgages they did not understand and did not appreciate were worse than their current mortgage.
The title of the book comes from a missing chapter in the First American Mortgage Co's sales manual. There were seven chapters, which had all kinds of psychological tricks for getting a customer to sign. (The most "cute" of which was that a salesman would always introduce himself three times-- once in the lobby of the sales office, then again after another person had lead the mark to his office, and a third time, after he had left the office on a contrived errand and returned. The idea was that the mark, having now "met" this salesman three times, was no longer convinced the he was a stranger but an acquaintance and possibly a friend.) "The Monster" was the secret chapter eight, a word-of-mouth only class-- sales trainees were forbidden from taken notes-- in which an old hand taught the sales trainees how to make a higher mortgage, with higher points and fees, look better than the mark's current mortgage. "Press the mark to hear the initial payment, make them ignore the refinancing fees, adjustable rate, or ballon payment, steer them clear, always say 'you hear their concerns' or 'that won't be a problem,' then steer them back to hearing the initial payment rate. Show them how a shorter-term mortgage will 'save them money' while making you rich."
Another mortgage company's president described his company's "LTV 80/20" as "the mortgage equivalent of a weapon of mass destruction." An LTV is the Loan-To-Value, that is, the ratio of the initial loan versus what the bank expects the value of the house to be when the loan ends. An LTV higher than 65% is generally considered a poor loan. The 80/20 loan was two mortgages issued simultaneously through two separate shell mortgage companies, for a total LTV of 100%! All of these companies had LTV loans in the 70%-85% range. These guys knew what they were selling.
And if he thought that was a weapon of mass destruction, I have to wonder what he thought of the third-party collateralized debt obligations and other "synthetic securitization" packages.
Hudson is a reporter, and he doesn't flinch at showing how many villains there were. The Federal Trade Commission comes in for a particular bashing as, in 2004, commissioners said "If there were any problems [in the mortgage industry], we would have heard about them," when in fact an average of 400 complaints a month were hitting their office. He shows how ACORN, that bugaboo of the right, was suborned by Ameriquest with supporting money into "looking the other way" as Ameriquest rampaged through poorly-educated minority neighborhoods in a deliberate and systematic way.
The Monster is a horror, but it's the reality in which we live. It's a picture of how one section of the financial industry blew up its alchemical laboratory, hid America's deeper flaws until it was too late, and transferred wealth up to Lehman Brothers, the biggest bank involved in sub-prime securitization. It shows how a well-educated, well-trained, motivated, unregulated, conscience-free industry set out to make money without limits, and in the process destroyed a once great nation.
Unfortunately, Hudson's book isn't a Stephen King (or even Stephen Coontz) work of fiction. It is horror, but it's not fiction. It's an investigation into the way mortgage-backed securitization, the mainstreaming of home equity lending, and a look-the-other-way regulatory regime, all combined into a perfect shit storm to wreck the American economy and destroy the middle class.
While the book concentrates on a few characters, the centerpiece being the late Roland Arnall, CEO of Ameriquest, its real villain is the root of all evil, money. In their quest for it, Ameriquest, First American Mortgage, and other mortgage brokers first reframed the once disreputable second mortgage, something you only took out if you were in desperate and dire straits, into the pleasant-seeming and even fair "home equity loan" or "home equity line of credit."
Although, as JP Morgan now admits, not only did incomes not grow during the Bush administration, but corporate accounts grew only because wages and benefits for the middle class were squeezed, we still bought cars and houses. How? With those equity lines of credit. With money we didn't have.
The Monster shows that not only was America's growth during the Bush Administration illusory, it was fraudulent. While salesmen with thousands of calls sold to people barely familiar with their first mortgage, much less their second, they were also doctoring the images, timing meetings to make sure customers were ill-prepared and time-pressured to just sign it all without reading it, and sometimes aggressively pressuring people to just sign. Back at "the lab," (a nickname some Ameriquest offices had for the office's copy room, where Wite-Out and scissors were used to creative effect), the loan paperwork would be doctored to reflect higher percentage rates, balloon fees, and other nightmares. Sometimes signers were given huge stacks to sign, not knowing that they were signing two mortgages, one of which was to be thrown out.
The entire disaster was a Ponzi scheme in which securitization (the conversion of bundles of mortgages into market-tradeable entities) fed huge funds into the system, and then groaning mortgages and other debts extracted huge funds from the wallets of ordinary citizens. When the music stopped, there were a lot of chairs missing, and a lot of people fell down. The current wave of foreclosures is not just because people lost their jobs in the disaster; it's because they lost their jobs after 10 million of them mistakenly bought mortgages they did not understand and did not appreciate were worse than their current mortgage.
The title of the book comes from a missing chapter in the First American Mortgage Co's sales manual. There were seven chapters, which had all kinds of psychological tricks for getting a customer to sign. (The most "cute" of which was that a salesman would always introduce himself three times-- once in the lobby of the sales office, then again after another person had lead the mark to his office, and a third time, after he had left the office on a contrived errand and returned. The idea was that the mark, having now "met" this salesman three times, was no longer convinced the he was a stranger but an acquaintance and possibly a friend.) "The Monster" was the secret chapter eight, a word-of-mouth only class-- sales trainees were forbidden from taken notes-- in which an old hand taught the sales trainees how to make a higher mortgage, with higher points and fees, look better than the mark's current mortgage. "Press the mark to hear the initial payment, make them ignore the refinancing fees, adjustable rate, or ballon payment, steer them clear, always say 'you hear their concerns' or 'that won't be a problem,' then steer them back to hearing the initial payment rate. Show them how a shorter-term mortgage will 'save them money' while making you rich."
Another mortgage company's president described his company's "LTV 80/20" as "the mortgage equivalent of a weapon of mass destruction." An LTV is the Loan-To-Value, that is, the ratio of the initial loan versus what the bank expects the value of the house to be when the loan ends. An LTV higher than 65% is generally considered a poor loan. The 80/20 loan was two mortgages issued simultaneously through two separate shell mortgage companies, for a total LTV of 100%! All of these companies had LTV loans in the 70%-85% range. These guys knew what they were selling.
And if he thought that was a weapon of mass destruction, I have to wonder what he thought of the third-party collateralized debt obligations and other "synthetic securitization" packages.
Hudson is a reporter, and he doesn't flinch at showing how many villains there were. The Federal Trade Commission comes in for a particular bashing as, in 2004, commissioners said "If there were any problems [in the mortgage industry], we would have heard about them," when in fact an average of 400 complaints a month were hitting their office. He shows how ACORN, that bugaboo of the right, was suborned by Ameriquest with supporting money into "looking the other way" as Ameriquest rampaged through poorly-educated minority neighborhoods in a deliberate and systematic way.
The Monster is a horror, but it's the reality in which we live. It's a picture of how one section of the financial industry blew up its alchemical laboratory, hid America's deeper flaws until it was too late, and transferred wealth up to Lehman Brothers, the biggest bank involved in sub-prime securitization. It shows how a well-educated, well-trained, motivated, unregulated, conscience-free industry set out to make money without limits, and in the process destroyed a once great nation.
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no subject
Date: 2011-07-20 03:01 pm (UTC)I pushed the paper back and told them that if I walked, I'd spell all of their names to the Banking Commissioner for the state. Suddenly they found the "misplaced" paperwork and I got my fixed rate mortgage.
No, we don't need any stinking regulation... businesses work better without government interference... Hogwash. A society without rules is anarchy where the strong kill the weak. I don't know why people think business without rules is any different.
no subject
Date: 2011-07-20 05:07 pm (UTC)no subject
Date: 2011-07-20 05:25 pm (UTC)If I were a wealthy man, I'd create a bank that offered loans that you simply paid double back over a fixed time period. It would cost the customer less, make default more difficult, and also make it impossible to pay off ahead of time and thus avoid the interest. As other banks would have to offer the same to keep business, I'd be able to influence the economy directly.
no subject
Date: 2011-07-21 12:46 am (UTC)no subject
Date: 2011-07-20 07:22 pm (UTC)no subject
Date: 2011-07-20 05:59 pm (UTC)Have you listened to The Giant Pool of Money podcast of the show This American Life? If not, I strongly recommend it.
A minor point
Date: 2011-07-21 01:38 am (UTC)The actual quote is "the love of money is the root of all evil."
The difference seems important, since money is a very useful concept. The love or worship of it? Evil.
Re: A minor point
Date: 2011-07-22 12:16 pm (UTC)Money represents labor above all else. You understand this, right? Money is a symbol of value, and almost all value in the world comes from labor-- labor spent making tools, labor spent using tools to change raw materials into more valuable products, labor spent providing valuable services. It's rare for the materials in a product to be worth more than the labor used to create the product.
And you say you don't love money? Then you don't love labor.
. png
Re: A minor point
Date: 2011-07-22 01:44 pm (UTC)No, not anymore. I was an abstraction which has itself become the focus of attention, rather than being a symbol for "labor" or "value". Vast amounts of money can be made via activities which bear little, if any relationship to actual labor.
Re: A minor point
Date: 2011-07-22 04:55 pm (UTC)Everything comes down to labor. There is no other source of value in the world, and therefore no other source for money.
You may be trying, in your way, to suggest that there are "activities" that are immoral (by your standards) but nevertheless profitable in some sense.
Do not trouble yourself with these petty exceptions. They are not new, and they are not significant. Do not fixate upon them as you develop your political philosophy, or you will surely end up voting for Democrats. Or Republicans. The grand rule, the fountainhead from which all new wealth flows, is the productive labor of individuals, and THAT is what money symbolizes, today and always.
. png
Re: A minor point
Date: 2011-07-23 01:08 am (UTC)This works only as long as the value of labor can keep up. As soon as a currency is not anymore backed in most part by labor, but "too big to fail" phenomena, it is doomed to fail eventually, as are all Ponzi schemes.
Re: A minor point
Date: 2011-07-23 03:54 pm (UTC)The dollar isn't a hard currency, but the best economists figured out long ago that that isn't really a good idea. Like everything else on Earth, the dollar is worth what people will give for it, and as the world's most popular reserve currency, it's still very solid.
. png
Re: A minor point
Date: 2011-07-24 02:56 am (UTC)Oh, I understand them quite well, thank you. However I don't see enough value in posting a lengthy blog comment that nobody really cares about much anyway to spend the labor of doing an in-depth analysis that does justice to the complicated subject.
Still, a bank run and/or massive default on debt and an imploding Ponzi scheme have much in common.
> The dollar isn't a hard currency, but the best economists figured out long ago that that isn't really a good idea.
That's because a hard currency is incompatible with the concept of book money and depth. Book money does not actually represent a share of the reserve, but rather a share of someone else's debt. If book money is acknowledged to have the same value as more tangible forms of money, then the currency stops to be hard. So when a bank run happens, it comes down to a choice between possible bank collapse and deflation, or possible hyper-inflation.
However, a hard currency hinders economic growth (I hope I don't need to explain why), which is necessary in a debt-based system. That and inflation are necessary to counter the effects of money accumulation. So it seems to make sense to step away from a hard currency.
> Like everything else on Earth, the dollar is worth what people will give for it, and as the world's most popular reserve currency, it's still very solid.
That's just the "too big to fail" I mentioned, isn't it? Others have tied themselves in far too deep, by binding their economy to the dollar without having any say on the treasury's politics, or having accumulated so much dollars they need to be covering the US debt to protect their own investment.
But it's actually quite fragile and, for example, pretty much dependant on the political decisions of China.
This all might continue until the accumulated interest exceeds the value generated by work. But then, it's going down.
Re: A minor point
Date: 2011-07-23 08:58 am (UTC)Then one engages in a transaction with others, with money as the medium of exchange in that transaction, it is often the case that both parties gain some benefit from that transaction: when I buy a chicken breast at the supermarket, I'm using money that I received as part of some other transaction in order to secure some meat without having to raise and butcher a chicken myself. Meanwhile, the employees and owners derive benefit, as does the person who raised that chicken, or the person who sold feed to the raiser of that chicken, and so on.
None of that is disputed by me.
However, when one engages in, say, currency trading, what value is being generated, exactly? Who is benefiting, and to what degree?
You said "Everything comes down to labor". I disagree. I think your claim may have been the case when we were simple agrarian societies, but not today. Today, I'd assert that the more accurate phrase is "Everything comes down to perception." Value is a matter of perception.
There are those who would pay $300 for a pair of Gucci sunglasses. And yet, were I to put those sunglasses on, I may find that their ability to shield my eyes from glare was no better, and possibly worse than that provided by my $10 pair of BlueBlockers.
Does this mean that my sunglasses are worth $300? Does it mean that the Gucci sunglasses are worth $10?
Also, I found your claim that "There is no other source of value in the world [except for labor]..." to be rather troubling. I perceive (there it is again) a great many sources of value that have absolutely nothing to do with labor. I value happiness. I value enlightenment. I value knowledge. If I'm walking along, and see a discarded soda cup next to a trash can, I'll pick up the cup and put it in the can. If I see someone trying to move a piece of furniture, I'll stop and offer to help. In either case, I engaged in labor... yet no money changed hands. In either case, I derived value from my actions.
You also said "You may be trying, in your way, to suggest that there are "activities" that are immoral (by your standards) but nevertheless profitable in some sense." While there are activities which I consider to be immoral, and yet from which others derive some sort of profit, I certainly had no such activities in mind when I posted as I did, and am honestly puzzled as to why that idea ever entered your head based on the words I said.
As far as political philosophy goes, I strongly lean towards Libertarian Socialism (aka Anarchism), and an economic model known as Post-Scarcity, in which money is an abstraction for which there simply isn't any need, nor any point. Now, I'm well aware that we lack the means currently to implement either that political philosophy or that economic system, but I do believe they're both goals well worth striving for.
Finally, no, I have fallen into no trap. I've merely honestly expressed my own ideas, and my own point of view... and I stand by what I've said.
Re: A minor point
Date: 2011-07-23 04:15 pm (UTC)Currency trading is an immensely valuable activity! It's absolutely essential to the smooth operation of the world economy. Imagine how much time and money would be wasted if US residents had to pay for BMWs in Euros because there was no foreign exchange market! A US buyer would have to find some German computer store looking to buy $50,000 worth of Intel microprocessors, then each party would have to buy their respective local products and cross-ship them to the other country. Good grief, if any financial service has a great, obvious value, it's currency trading.
You may not like the fact that Gucci creates much of the value in its products by creating and exploiting fashion trends and slick marketing campaigns, but seriously, that's all labor just as much as the work of the people operating the plastic injection molding equipment.
When you talk about how you "value happiness" you're really just screwing around. When you stop to put a discarded soda cup in a trash can, you're spending your time, and you only have that time because you've paid for food and housing and the transportation that took you to this place where there is trash on the ground, and you only had that money because someone worked to create it. You may note that if you want people to go around picking up trash full time, you will also have to pay them to do it. I value playing with my kitten, but keeping the little guy alive to do it requires a whole lot of labor.
So you like political philosophies based on assumptions that you know are contrary to reality, eh? That kind of thinking has led to a billion murders over the years, but maybe you'll be the one to figure out how to make it work. Good luck!
. png
Re: A minor point
Date: 2011-07-23 05:55 pm (UTC)Tell that to all the people who engaged in transactions with Bernie Maidoff
"Currency trading is an immensely valuable activity! It's absolutely essential to the smooth operation of the world economy."
I find your enthusiasm on this point rather surprising, but OK...
"Imagine how much time and money would be wasted if US residents had to pay for BMWs in Euros because there was no foreign exchange market!"
When I speak of currency trading, I speak of individuals who spend their time doing just that... trading currency. I'm *not* speaking of individuals who are exchanging currency as part of some other set of economic transactions. I spend all day trading dollars for euros, waiting until the value of the Euro goes up, and then trading it back, I haven't helped anyone buy anything.
"You may not like the fact that Gucci creates much of the value in its products by creating and exploiting fashion trends and slick marketing campaigns, but seriously, that's all labor just as much as the work of the people operating the plastic injection molding equipment."
I'd say that makes my point with regards to it being a matter of perception rather than value per se.
"When you talk about how you "value happiness" you're really just screwing around."
No, I'm really not. I'm speaking of value.
"When you stop to put a discarded soda cup in a trash can, you're spending your time, and you only have that time because you've paid for food and housing and the transportation that took you to this place where there is trash on the ground, and you only had that money because someone worked to create it."
I could be penniless and homeless, and still engage in exactly the very same acts, for the very same reasons.
"You may note that if you want people to go around picking up trash full time, you will also have to pay them to do it."
I could also simply engage in a public campaign to encourage people to clean up after themselves, and to throw away trash when they come across it.
"So you like political philosophies based on assumptions that you know are contrary to reality, eh?"
If you'd care to make an argument against the viability of Libertarian Socialism or Post-Scarcity economies, I'd be interested in seeing such an argument... but don't expect me to be convinced by a mere assertion on your part.
Re: A minor point
Date: 2011-07-22 02:37 pm (UTC)Re: A minor point
Date: 2011-07-22 04:57 pm (UTC)Sure, sure
Date: 2011-07-22 12:24 pm (UTC)And who were those people? Who was behind the government subsidies of the housing market? Mostly those who were politically aligned with the construction worker unions. That is, the left.
But you're going way too far to claim that second mortgages "destroyed a once great nation." First, our nation wasn't destroyed, and second, second mortgages were hardly of much significance to what did happen.
For the details on THAT, I recommend "Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon". http://www.amazon.com/gp/product/0805091203
Like most people covering the financial crisis, the authors start a little late, but it's still clear which side of the aisle did most of the pushing here.
. png
no subject
Date: 2011-07-24 11:45 pm (UTC)¹(Let's shave this whale with Occam's Razor. If the banks were "forced" into making first-time home mortgage loans to the poor, why didn't the all-Republican Congress and President Bush repeal those regulations?)