Don't make me angry. You won't like me when I'm angry.

Finances and crises

Introduction

I write about the financial crisis because the banks and their behavior make me angry and I want people to know; to know about bank behavior and about me being angry. For the banks it is just Help yourself to what you want. Which is not difficult when they have the support of the government.
It started with me reading Johan Norberg's Financial Fiasco. At first I just thought I could write a fairly short post but it has grown, for me it has become a pretty big undertaking. It really isn't much news, mostly just me repeating what I've read.
It is quite possible to be both rich and productive. I write mainly about people both rich and destructive, about those behind the subprime crisis, about a large part of the financial sector, about those behind the Too Big To Fail banks and about their cronies. About what I like to call the bankers. In my posts I have many links, I really recommend them to those who want to know more.
I also have notes with book references, there is a book-list in the Finances appendix. link
My main source is the blog Naked Capitalism. I have mailed them to ask if it's OK, I got no answer so I hope it is. I don't know if they are always right. When it comes to criticism of banks and other financial institutions, they seem well supported by evidence. link

I have no financial training. It is possible that I am over-simplifying. Theoretically, it is possible that I make mistakes; should I make any, I hope somebody will tell me.

To keep the reader's attention, I have tried to keep my writings short and to the point. Mostly through illustrative examples, you will find more on the theory towards the end.
I have planned about 30 chapters, below you will find a preliminary list with a short summary. The chapters are more or less finished, a few will be added.

The Savings and Loan (S&L) crisis was a predecessor to the ensuing subprime crisis. It was about profiting from fictitious profits through absurdly overvalued assets, about leaving multibillion losses to customers, shareholders and taxpayers. It was about federal support to the fraudsters. Smaller but similar to the subprime crisis, with one big difference: in the S&L crisis, many of the main perpetrators got prison sentences. In the subprime crisis, only some small fry got some symbolic sentences.
To help the economy, institutions like the Fed and FHA were created. Government sponsored Fannie and Freddie were founded. Federal pressure made housing loans cheaper, first under Clinton, then under Bush. Subprime loans exploded, with private interests taking over much of the market.
Banks used to keep mortgages. Now mortgages are securitized, lumped together in CDOs and sold as packages to pension funds and others. Synthetic CDOs are introduced, multiplying the risk with already overpriced standard CDOs.
Credit Rating Agencies are supposed to make securities trading more secure by assessing risk for default. Instead, due to pressure from loan institutions and to greed, securities were rated as next to no risk, driving up valuations to absurd levels.
With liar's loans, teaser loans and with assurances of rising values, the banks sold more and more mortgages. To people who wanted a home of their own and to speculators. The banks didn't care how bad the mortgages were because they were sold to others, to taxpayer guaranteed Fannie and Freddie and to investors like pension funds.
At first, the market was closed. CDOs were sold bank to bank or bank to investor. There was no real market price; the parts could set their own, raising them, creating a fictitious profit and reap their bonuses. When the market opened, the prices fell. Some banks played extra dirty, selecting the worst securities they could find, selling them as especially good and then going short on their customers, profiting when their customers failed.
When the prices fell, the banks got into trouble and the Congress decided they needed $700 billion. The banks were supposed to support business and consumers with loans, but most of the money was used for other purposes.
At least since 2004, many banks have cheated with mortgage handling. Instead of transferring the physical documents as prescribed by law, they were registered electronically while the documents were destroyed or left with the originators. This means that the receiving trust did not have the document. This in turn means it had no right to foreclose. To resolve this problem, robo-signers were used; lots of false documents were produced.
In the olden days, New York Stock Exchange firms had to be partnerships, the firm partners were personally responsible for the firm's debts. This changed and now the top executives face very little risk. With growing funds, banks became more depending on fees than on performance. One result was that although mortgage modifications often gave more money, the banks preferred foreclosure. They got more money while customers and borrowers got less.
To make mortgage trading more streamlined, the banks created special companies handling registration and foreclosure. They even had a special company handling robo-signing.
With the crisis, many home owners got in trouble. Even if they had done only what the bank told them to, the banks had no responsibility. Federal HAMP was created to give financial relief to struggling homeowners. According to FBI, up to 70% of defaulting loans were borrower fraud. With banks abusing borrowers and lying about HAMP support so they could extract extra fees, many foreclosures were bank induced.
The banks used many tricks to hurt the borrowers. Like unwarranted fees, unwarranted insurances, delayed and misplaced payments. To extract more fees, they dragged on with foreclosure procedures. Sloppy handling, including fabrication of new documents was common.
Many foreclosures were the result of bank abuse, but the banks had excuses. For example that foreclosed borrowers did not deserve to stay in the house. Homes were mixed up. Even homes paid in cash were foreclosed on, something that should not have been possible. The banks violated the rules, deliberately and by mistake; no matter how wrong they were, they didn't give up when it came to fleecing their victims.
The bank wrote the wrong address and Larry Delassus lost his home. Fraudsters took his house, the court gave the house to the bank and Sunny Sheu lost his life. How the banks can get away with next to anything, probably even murder.
Nobody expected it. Well, Greenspan didn't. Expect the crisis that is. A lot of others did.
Greenspan and lots of Wall Street people claim special knowledge. Either they do not know what they are doing or they are deliberately destroying the economy.
Big goes free, small gets sentenced.
The Department of Justice can waive prosecution if the company promises not to do it again. JPMorgan Chase got at least 22 waivers because they have "a strong record of compliance with securities laws."
In the Enron scandal several senior executives were sentenced, with up to 24 years in prison. To make prosecution easier, the Sarbox Act was enacted in 2002 and in the subprime crisis no big shots were prosecuted.
Some judges do go against the banks. Unfortunately too few and too often revoked.
There are lots of regulators, national and international. They just won't work.
The banks are setting the rules, with very accommodating SEC, Treasury, OCC and Congress obstructing serious inquiries.
The banks agree to pay compensation to abuse victims; OCC and ten banks enter an $8.5 billion settlement. Sounds like a lot but a fraction of actual damage done. Bank sponsored reviews find no or next to no errors in foreclosure handling; local audits find more than 75% faulty or questionable.
A big bank review found that the banks had many victims. The review however was so mangled it had to be cancelled before finishing and random pittances were doled out to some victims.
Investing in production did not give the profit that the bankers wanted. So they found alternatives. Like lobbying, buying back own stock, commodities, "innovations", moving profits abroad.
Sewage system should cost $250 million, loan cost is $3.14 billion.
Bank transgressions besides the subprime crisis: money laundering, fictitious trades, energy market manipulation, obstruction of justice and more. Borrowing federal money at near zero interest and buying high interest government notes. Ripping of pension funds. Mandatory arbitration.
Wall Street competence changes. Investments in lobbying and buybacks pay better than investments in better products.
Regulation can be both god and bad. Standard of living in regulated communist Cuba is higher than in many little regulated Latin-American countries.
Greed makes you try harder. If being productive pays best, you try to be productive. If looting pays best, you try to loot. The corruption of the Invisible Hand doctrine.
Like junkies, banks only demand more and more.
Conclusion. A summary of the points I find important.
List of contents in financial posts.
Terms, institutions, persons, sources.
Selection from blog NakedCapitalism

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