By Neville Bennett
I have been writing about the US housing problem on this website since 2006. I was incredulous that anyone would issue sub-prime.
Since then it has been a disaster that has dragged the world towards the abyss.
It is far from over, as new housing starts last month were the lowest since 1963 when records began.
While the situation merits despair, some black comedy has emerged. Two episodes are worth a look.
The new house bonus scam
The Federal government has promoted several schemes to encourage the building of new homes. Accordingly there are bonuses of about US$8,000 available to the purchasers of new homes.
An investigation has found that 19,300 people received the bonus without the hassle of actually buying a house.
Some were rather precocious: 580 were below the age of 18, including a 4-year old. I am surprised by the lack of enterprising pets.
The new leisure class, the prison population took a great interest: 1,295 claimed to have bought a house while they were incarcerated. Some were especially optimistic, 241 prisoners were on life sentences successfully applied for a bonus without buying a house.
The authorities are disturbed to discover 87 Internal Revenue Service employees fraudulently claimed the benefit.
These frauds cost the taxpayer $30 million.
The program seemed to make the housing market more volatile. It did stimulate some construction but when the subsidy ended, construction seized up to its lowest level in 50 years.
The market is likely to remain dull as some potential buyers will hold off in the expectation that President Obama will renew the subsidy.
Some analysts argue that all subsidies are bad, but the evidence is mixed.
The subsidy available to people who traded “clunkers” for new cars appeared to kept the American auto industry alive at a time of plunging consumer confidence.
That program threw a lifeline to millions of people in the car factories, and those who turned raw materials into parts. It helped to keep the economy alive and helped some people retain jobs while millions were losing them.
The effects of the “clunker’ scheme were good but I have not seen a cost benefit analysis. Nor have I heard of the externalities of corruption.
But there is always a cost, especially adding to the national debt.
Given a choice, I would opt for job creation schemes rather than the bailout of banks. Some Keynsian pump-priming has merit in a recession.
Please, please sell me more toxic assets: I cannot get enough of them!
Imagine that you are a huge, respected mortgage company doing a good job in housing millions of Americans. Then you notice that other mortgage companies are registering profit margins substantially higher than yours. You do not really need to compete as your superb credit rating practically guarantees as much funding as you need.
But hey! We live in a competitive society, so of course we will compete. So you buy (toxic) securitized sub-prime.
This increases nominal profitability. Fine! Then you start worrying: can you guarantee supply. That’s a reasonable worry: every business takes care to ensure a good supply chain. How far do you go?
Read on for a case study in stupidity involving the biggest mortgage holder, the Federal National Mortgage Assocation (FNMA) or Fannie Mae, and Countywide (CHL) who was the biggest supplier of subprime - and is now defunct.
Fannie Mae was desperate to get securitised loans from Countrywide to increase the size of it loan book. In 2007 it bought 28% of its loans from Countrywide.
The New York Times has recovered an internal Fannie Mae document from 2004 called a 'customer engagement plan' by which Fannie employees were to keep sweet Countrywide’s boss, Mr Angelo Mozilo, the CEO and 14 of his top staff.
The document is redolent with MBA language: "Deepen relationship at all levels throughout CHL and Fannie Mae to foster alignment and collaboration … at every opportunity”. Staff were encouraged to mingle with Countrywide’s top managers.
It stressed opportunities at up-coming conferences. It wanted “deep rapport” with CHL president David Sambol which was difficult as he did not go the conferences.
Staff should visit CHL headquarters on any excuse to seek “opportunities for meetings ... to foster ongoing communication channels that allow us to understand and leverage Sambol’s priorities and demonstrate our commitment to make his successful”.
I do not know what happened to Mr. Sambol but Mr Mozilo is in prison.
Mozilo is a key figure in the meltdown of the world financial system. He has cost taxpayers worldwide a fortune.
He was a butcher’s son who became extremely wealthy with a string on mansions and gold-coloured Rolls Royce cars. He built a US$200 billion company from scratch, and used subprime to generate revenue of US$8 bln in 2004.
Mozilo was charged by the US Securities and Exchange Commission with insider trading: when at the helm of Countrywide he made $140 million by selling CHL stock, while getting $82 million in performance pay in the period 2005 to 2008. His email admitted subprime was toxic when economic conditions inevitably turned - he understood what he was peddling.
Countrywide collapsed in 2008 and major parts were absorbed by Bank of America.
* Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR.