"The risky-lending boom of the early 21st century was a Ponzi scheme. It depended on constant growth in real estate values. You could lend anybody anything so long as their house was worth 10 percent more each year. For lenders, growth meant collateral would always be worth more than the money tied up in it."
Following up on the Madoff scandal, some analysts are now taking a fresh look at subprime and realizing that it, too, was nothing more than a massive pyramid scheme.[1] What’s different is that the reporter in that first quote was writing 22 months ago,[2] back in the era when Susan Bies and other authority figures were working furiously to keep citizens in denial. He continued …
…
According to Hopp and Arrowsmith, some lenders made loans worth up to 20 percent more than the assessed value of homes. These lenders believed appreciation would make up for negative equity. When the market stagnated and borrowers couldn’t keep up with mortgage payments, negative equity and zero-down lenders ended up with a bunch of houses worth less than the amount of money owed on them.
When that happens, you get foreclosure auctions where only one house in 32 is worth a bid.
And lo and behold, the American Dream comes to Jesus.
Four months after posting that story, and just 5 days before the two Bear Stearns hedge funds imploded, Jim Spencer’s 41-year career in journalism came to an end [3] when he was fired from the Denver Post. He carried on as a blogger for a bit more than half a year, but in early 2008 his voice was indefinitely silenced [4] when he took a job in Public Relations.
Since I started with Doom, I’ve seen some of the very best journalists in our area leave or just fade away. Among the ones I miss the most are Steve Schurr and Danielle DiMartino. The first left FT’s Fannie Mae beat for London and hedge funds, then just sort of disappeared. The second went from the Dallas Morning News to the Dallas Fed.
By now you all must realize that we are in the midst of a real economic war. In that context, accurate and persistent reporters who aren’t afraid to speak truth to power are priceless assets. Simply put, they constitute the N2 shop for the American people.
It’s all very well to realize now that subprime had the dynamics of a Ponzi Scheme, but if this had become generally known almost two years ago like Spencer was trying to make happen, we might well have avoided much of the damage that incubated below public opinion’s radar until now.
————
[1]: "Ponzi Nation", by Matthew Goldstein, BusinessWeek, December 14, 2008.
But derivatives consultant Janet Tavakoli may be onto something. In a note to her clients, she says the biggest Ponzi scheme of all may be the one that brought the world financial markets to its knees. And that’s the scheme that united Wall Street bankers with mortgage lenders in a bid to funnel more and more money into the market for supbrime homes loans. She says the packaging of iffy home loans into securitized bonds that could be sold to insitutional investors—many of them relying on borrowed money—was a system born to fail.
“The largest Ponzi scheme in the history of the capital markets is the relationship between failed mortgage lenders and investment banks that securitized the risky overpriced loans and sold these packages to other investors—a Ponzi scheme by every definition applied to Madoff,” says Tavakoli. “These and other related deeds led to the largest global credit meltdown in the history of the world.”
[2]: "Risky loans come home to roost", by Jim Spencer, Denver Post, February 21, 2007.
[3]: "Adieu – battles go on, but this job doesn’t", by Jim Spencer, Denver Post, June 15, 2007.
[4]: "Moving on Sadly but Proudly", by Jim Spencer, Colorado Independent, February 3, 2008.
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“I am told I must leave for lack of money, not lack of effort”
This was probably the given reason at Colorado Independent also, but you have to wonder if the ‘Smart Money’s derisive laughter didn’t have a little something to do with the choice of cuts.
Generally known but ignored.
Massive debt, the new heroin.
toysarefun -
I believe that makes Paulson, Kashkari & Co. a the world’s largest methadone clinic.
Good commentary!