In early 2007, I bought my first home. Our mortgage officer, who raised the bar for a profession that makes a habit of dropping it, often in the gutter, explained to me why he didn’t sell the once common variable rate loan. He said they’d become quick and easy commissions that were sold to people who could not afford the adjustments. That was the tip of the iceberg America rammed into in 2008. He told us about liar loans (no-income verification or no-asset verification) loans, originally designed for people the IRS wishes they didn’t have to deal with: Waiters, cab drivers, call gir- er, um, escorts. They were for people who make a lot of cash that, even if you were inclined to report it, would be difficult to verify.
Some of the dimmer bulbs on Wall Street thought, “Hey! We can rake in a lot of interest by selling these things! And then turn around and sell the loans as investments! Win-win!”
So you sell loans to a lot of people who don’t know any better and can’t pay them off. Let’s do some abstract math here. You’re charging high interest to people who can’t afford it. Sell those to enough people who can’t afford it, and what do you think is going to happen?
Lehman Brothers, a Confederate company that survived the Civil War, vanished overnight. What the Union Army could not do to it in four years of the bloodiest combat in American history, stupid mortgage brokers managed to do in a fraction of the time. And more banks followed. They wanted a bailout.
The problem with banks is they are like the one brother-in-law every family has: Kind of stupid, squanders his money, and causes more financial problems for the family than any hospital stay or car breakdown. But if you don’t bail out your brother-in-law, Thanksgiving is a little quieter this year. If you don’t bail out the banks…
Yeah, that’s the guy holding your wallet. The thing is, they pay themselves bonuses even when they lose the gross national product of a small European nation. Notice I said Europe. You have to be pretty wealthy to go as spectacularly broke as Greece.
Of course, we could go to town on the bankers. I don’t think there’s a bank CEO employed in 2008 who did not deserve to do some jail time. Many of these institutions should not have been bailed out. They should have been taken over. If I, the taxpayer, have to spend $700 billion to keep the Great Depression from repeating, I think a few hundred bank executives should have to move into trailers and live on cat food for a while, since they should have their assets taken away from them. Hey, bud, you wrecked the economy. You pay for it. I think several banks should have been stripped for parts and sold off into smaller bite-sized pieces. I think there should be a rule that, if you make up a certain percentage of the economy, you have to start spinning off units so your bad management – because all companies eventually get bad management – doesn’t mean I’m filing for unemployment when I have nothing to do with banking.
But alas, we are a hands off society. Let the market do what it will. Look, I love capitalism. I love the idea that anyone, anywhere can take an idea and make a buck. But it has to have safeties on. That’s a point I will not debate you on. The banks whine about Adam Smith’s invisible hand whenever new regulations are passed to keep them in check. The trouble is banks keep the invisible hand in cuffs. Capitalism without competition is not capitalism. It’s feudalism. Pure and simple.
We need banks. That’s fundamental economics. But right now, banks need to be treated like the guy who just got out of prison for stealing huge sums of money. No one should trust him. No one should treat him with the respect due a normal citizen until he earns his place back at the table like everyone else.
Funny thing is most ex-cons I’ve known do this without really thinking about it. I’m not holding my breath about the banks.